A tool deployed by the People’s Bank of China to defend the yuan may result in some collateral damage: a weakening in demand from bond investors who like to hedge their currency exposure. With the PBOC ramping up overseas yuan funding costs to deter short sellers, the premium that dollar-based investors enjoyed for swapping their US currency has evaporated. That has turned hedged purchases of Chinese bonds into a lower-return proposition than Treasuries. As a result, global funds which employ such a strategy may well set their sights on other bond markets instead. The dilemma underscores how Beijing is finding it ... (full story)