China's central bank slashed the size of its daily open-market operation to a record low, extending efforts to absorb excess liquidity from the financial system. This move comes as the bond rally intensifies, pushing benchmark yields to their lowest level since August. The PBOC's actions signal a tightening of monetary conditions despite the recent market euphoria.

The reduction in cash operations reflects the central bank's concern about excessive liquidity in the banking system. As bond prices surge, yields fall, potentially creating asset bubbles and financial instability. This delicate balancing act shows the PBOC's focus on maintaining orderly market conditions while preventing excessive speculation in the bond market where prices have reached extraordinary levels.

Market participants now face a challenging environment where the central bank's liquidity withdrawal coincides with record-low yields. This combination creates pressure on banks' net interest margins and could lead to more selective lending practices. The record low operation size indicates the PBOC's determination to normalize monetary conditions gradually while avoiding abrupt market disruptions.