In a significant move, the Chinese central bank announced on Monday that it had purchased 200 billion yuan ($28.52 billion) of government bonds through open-market operations in September. This development comes amid a backdrop of sharply reversing long-dated bond yields, which had previously plummeted to record lows.

This drastic reversal follows a series of stimulus measures and other initiatives by central and governmental authorities aimed at rejuvenating a stagnating economy. The People's Bank of China (PBOC) stated that the operation was intended to 'strengthen countercyclical adjustment of monetary policy and maintain adequate liquidity within the banking system'.

The central bank has not specified whether these bonds were short-term or long-term as it did in the previous month. Until recently, China's bond market has experienced an unprecedented rally, with banks and investors gravitating towards safer assets in response to a languishing economy. The PBOC had been cautioning market participants about the inflating bond prices and, last month, took steps to cool the overheated market by selling long-dated bonds.

Wei Li, a multi-asset quant solutions portfolio manager at BNP Paribas Asset Management, shed light on the PBOC's strategy, noting that the central bank's goal of sustaining an upward-sloping yield curve serves dual purposes. Specifically, lower short-term yields are intended to spur economic growth, while higher long-term yields aim to foster investment.

Last week saw the rollout of what is being described as China's most assertive stimulus package since the pandemic. This package led to unprecedented gains in the stock market but simultaneously caused bond prices to plummet. Li remarked on the possible migration of funds from bonds to equities as market participants brace for stronger growth prospects and higher returns on stocks. However, he also noted that the shift might not be as dramatic as anticipated.

Ten-year and 30-year bond yields have surged by 13 and 22 basis points respectively, since the announcement last Wednesday. The spread between 1-year and 10-year bonds has widened by 15 basis points, suggesting a steeper yield curve. This significant rebound in yields indicates that the PBOC might shift towards purchasing long-term bonds, marking a considerable deviation from its previous actions.

In August, the PBOC disclosed that it had bought short-dated bonds and sold long-dated ones, the first such revelation under a newly established open market operation column.

Further complicating the economic landscape, assets of Chinese bond mutual funds experienced a decline for the first time this year in August, falling to 6.55 trillion yuan, a 6% dip from the previous month, according to official data.

Summing up the wider implications, the sustainability and effectiveness of these policy measures remain pivotal in determining their impact on economic recovery and investor sentiment in the longer term.