(Bloomberg) -- China’s sovereign bond futures saw a record closing high Tuesday as the buying frenzy for government debt extended despite scrutiny from authorities.  

Futures on 10-year notes closed up 0.1% at 104.87, the highest on record in data going back to 2015. The benchmark 10-year sovereign bond yield lingered near the lowest level in more than two decades.

China’s government bonds have been on a tear as mixed economic data prompt investors to take refuge in haven assets. Speculative buying from retail investors, demand from fund managers riding a wave of inflows and purchases by companies seeking higher yields than regular bank deposits are also fueling the rally.

Some traders are also betting on further stimulus to weigh on yields, even though the People’s Bank of China has resisted market calls for more interest-rate cuts amid depreciation pressure on the yuan. The central bank kept the interest rate on its medium-term loans unchanged on Monday.

“Clearly the market is still not very confident of macro improvement so traders buy bonds,” said Albert Leung, a rates strategist at Nomura Holdings Inc. in Hong Kong.

The moves in China’s bonds are in contrast with global peers that are being buffeted by uncertainties on Federal Reserve rate cuts. The futures record came after data showing global investors boosted their holdings of Chinese debt to a record last month, taking advantage of an anomaly that allows a premium when swapping dollars into the yuan.

Foreign Holdings of Chinese Bonds Hit Record on Swap Tailwind

The rapid gains have caught the attention of Chinese policymakers. The PBOC could step into the market to sell bonds if demand for the haven assets continues to rise, according to a front-page report in late May in newspaper backed by the monetary authority. 

That’s after Beijing sought to push back on the rally in late April as it warned of a reversal and hinted that a mismatch between market prices and the economic outlook will correct.

The bond rally is a double-edged sword for China. On the one hand, it helps support growth by lowering borrowing costs. However, the emergence of a bond bubble has the potential to destabilize financial markets and derail the recovery if it bursts.

China Steps Up Warning on Relentless Bond-Buying Frenzy 

In the corporate bond market, lower funding costs have prompted local companies to sell a record amount of debt this year. Benchmark local bond spreads have tightened near all-time lows.

Even the prospect of higher debt supply from China’s 1 trillion yuan ($137.9 billion) special sovereign notes issuance this year hasn’t cooled the demand. The second issuance of such debt late last month saw bids that were more than four times the planned auction amount.

For Gary Ng, a senior economist at Natixis SA, China’s 10-year yield can fall to 2.18% by the end of the year, from its current level of around 2.25%.

“The lack of economic and credit data improvement is sparking speculation on lower rates and demand for bond investment,” he said. “Although the hawkish Federal Reserve can be a key factor, it is just a matter of time that China will lower interest rates.”

(Updates with further context. A previous version corrected reference to the MLF decision on Monday in fourth paragraph.)

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