SHORT sellers may be aggravating China’s biggest bond selloff in four years.

While the nation’s debt market has no official measure of short sales, analysts say a surge in bond lending has been partially fuelled by rising bearish bets. A record 1.82 trillion yuan (US$274 billion) in notes has been lent out this year, 18 percent more than the total for all of last year, according to clearinghouse ChinaBond. Short sellers profit from falling bond values by selling borrowed notes and buying them back after prices fall.

“This creates a vicious feedback loop — when institutions think bonds will fall, they borrow and sell, causing a plunge in the securities, which then drags futures down, and thus there’s more shorting,” said Wang Wenhuan, an analyst at Huachuang Securities Co. in Shanghai. “As investors are still quite cautious, there will likely be more bond borrowing in the near term as yields climb.”

The debt market has slumped under the strain of rising inflation and an official drive to curtail excessive borrowing, with the benchmark 10-year sovereign yield set for the biggest annual increase in four years. While Chinese regulators have a history of clamping down on bearish wagers in the stock and currency markets, they haven’t taken any major measures to curb short-selling of bonds.

The nation’s government notes are headed for the worst selloff since 2013, with the 10-year yield surging 86 basis points this year. The rate dropped the most in five months Thursday, amid speculation recent losses were excessive.

Market participants have borrowed 960 billion yuan in sovereign bonds and 710 billion yuan in policy bank notes this year. They like such securities for short selling and hedging because they’re the most liquid, said David Qu, a market economist at Australia & New Zealand Banking Group Ltd.

The amount of overall bond lending started picking up late last year, when policymakers began intensifying their deleveraging campaign. Financial institutions borrowed 170 billion yuan in notes every month on average in the past year, compared with 92 billion yuan in 2015, when the bond market was stronger.

Commercial banks may be borrowing securities to short, rather than selling government bond futures, because they aren’t allowed to trade the derivatives.

Still, not all bond borrowing is for shorting. It’s also used by traders seeking financing when cash supply is tight. (SD-Agencies)