PBOC Adds Funds in 14-Day Reverse Repos First Time in Six Months

Updated on
  • Benchmark seven-day money rate rises to highest since March
  • Central bank warning market against too much leverage: analyst

PBOC Said to Offer 14-Day Reverse Repos

China’s central bank injected cash into the financial system using 14-day reverse-repurchase agreements for the first time since February amid speculation policy makers are looking to increase the use of more expensive, longer-term funding to cool a bond rally.

The People’s Bank of China auctioned 50 billion yuan ($7.5 billion) of the contracts in open-market operations at 2.4 percent Wednesday, according to a statement on its website. The central bank also offered 90 billion yuan of seven-day reverse repos at 2.25 percent. Both rates were unchanged from previous sales.

The return of the 14-day contracts comes amid speculation the monetary authority will seek to curb the use of short-term borrowing to finance bond purchases. A record rally in China sovereign debt has prompted traders to increase leverage to amplify returns, with transactions of overnight repo agreements climbing to a record 50.4 trillion yuan in July, compared with a monthly average of 31.8 trillion yuan last year.

“The offering of long-term funds seems to be sending a signal to warn market participants not to get excessively leveraged,” said Liu Changjiang, a bond analyst at Soochow Securities Co. in Shanghai. “The follow-up impact hinges on what the PBOC plans to do next - whether it will continue to offer 14-day reverse repos and any other policies - so the market can gauge its determination.”

The benchmark 10-year bond yield dropped to a decade-low of 2.64 percent on Aug. 15. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose two basis points to 2.53 percent as of 5 p.m. in Shanghai Wednesday after surging the most since July 2015 on Tuesday.

The benchmark seven-day repo rate advanced as much as 13 basis points to a five-month high of 2.53 percent, weighted average prices from the National Interbank Funding Center show. The 14-day contract rose nine basis points to 2.79 percent.

The reverse repo has become the PBOC’s main interest-rate tool, meaning that the central bank could be abandoning the benchmark deposit and lending rate as policy instruments, said Iris Pang, senior economist for Greater China at Natixis SA in Hong Kong. She said she sees the open-market operations as aimed at building a short-term yield curve. Rates rose in general because the market sees no near-term cuts in interest rates or bank reserve requirements, said Frances Cheung, head of rates strategy for Asia ex-Japan at Societe Generale SA.

The central bank has also gauged demand for 14-day reverse repos for Thursday, according to a trader at a primary dealer that bids in the open-market operations.

‘Bubble Risk’

“The recent rally in bonds, fueled by leverage on the back of stable short-end funding, raised concern about a potential asset bubble risk,” said Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp. “The PBOC may want to curb leverage in bonds as funding costs of the 14-day reverse repo is higher that for the seven-day and overnight reverse repos. Bond yields may go up as a knee-jerk reaction, but this may also create an opportunity for traders to buy bonds on the dip.”

In the currency market, the onshore yuan declined 0.19 percent to 6.6532 a dollar, according to China Foreign Exchange Trade System prices. The offshore currency declined 0.13 percent, while a gauge of dollar strength rose for the fourth day in a row.

Watch Next: Will PBOC Pour Cold Water On Hot Bond Rally?