WHY ARE BOND YIELDS THE MEASURE OF WRITEDOWNS FOR CENTRAL BANKS

The central bank has been keen to show it is not financing the government's budget deficit To do this, it uses the debt-to-GDP ratio, which is the latest measure of its efforts to wean the economy off its addiction to debt But even if it is trying to stop the borrowings, it cannot do that overnight, especially not with so much debt to service The central bank can try to push up the interest rate it charges banks to borrow from it This is called repo € or repurchase operations But the repo rate is generally not much higher than the government bond yield, which is why the latter is the true measure of the central bank's write-downs So, if the 10-year government bond yield goes up, the central bank is having to buy more bonds to keep injecting money into the banking system The central bank cannot simply raise the rate it charges banks to borrow from it as there is a risk of savers dumping their money into the banking system because of the higher interest rate And that is why it has been pushing up the repo rate, which is a less risky measure The central bank has also been buying foreign currencies from the market to keep the yuan stable The 10-year government bond yield is also a reflection of sentiment on the mainland If investors are confident about the economy, they will demand a higher yield for the bonds they lend to the government An increase in the yield is also a way of showing how much investors are not convinced by the central bank's efforts to stabilise the yuan If the central bank is losing the battle to stabilise the yuan, investors will demand a higher return to lend money to the government