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China's Surging Bonds Show Angst About a Cash Crunch Is Easing

Updated on
  • Benchmark 10-year yields slumped by most this year on Monday
  • Gains not sustainable as deleveraging continues, ANZ’s Qu says

China’s liquidity indicators are flagging that concerns over a cash crunch come end-June may be overdone.

Cash injections from the central bank have helped ease anxiety that Beijing’s deleveraging drive will make China’s traditional mid-year liquidity squeeze even worse this year. Ten-year sovereign bond yields slumped the most in 2017 on Monday, and interest-rate swaps are close to their lowest level since March. Meanwhile, the three-month Shanghai Interbank Offered Rate has fallen in the past few days from its highest point in more than two years.

The People’s Bank of China pumped a combined 360 billion yuan ($52.7 billion) of funds into the financial system through open-market operations on Monday and Friday, the most since January.

“The market still has a bull market mentality -- investors think the central bank will always ease when there’s stress, and they pushed bonds higher as policy makers did what they expected with the liquidity injections,” said David Qu, a markets economist at Australia & New Zealand Banking Group Ltd. in Shanghai. “The surge won’t be sustainable, and bond prices will be volatile in the future. The market will continue to expect the PBOC to ease, while the authorities seek to deleverage.”

  • China’s government bonds extended gains Tuesday. The one-year yield fell six basis points to 3.51 percent, while the 10-year yield was little changed at 3.50 percent.
    • The Ministry of Finance bought 1.2 billion yuan of one-year sovereign notes at 3.49 percent Tuesday, utilizing a new tool to boost liquidity for the first time.
    • “This move is important in a symbolic sense, as it demonstrates MOF’s willingness to support the market at current yields,” said Citigroup Inc. analysts.
  • One-year interest-rate swaps climbed three basis points to 3.51 percent, after tumbling nine basis points on Monday
  • The PBOC’s liquidity injections via open-market operations matched maturities Tuesday. The bank added a net 410 billion yuan of cash through reverse-repurchase agreements last week, the most since January.
  • Three-month Shibor fell three basis points to 4.71 percent, after touching 4.78 percent on June 13 and 14, the highest level since April 2015. One-month Shibor slipped four basis points to 4.66 percent Tuesday after halting a 23-day rising streak the day before.
  • Yields on three-month AAA rated negotiable certificates of deposit -- a key source of funding for China’s small and medium lenders -- declined 15 basis points to 4.85 percent Monday from a record high of 5.00 percent set on June 9.
    • The cost to issue NCDs will likely retreat to about 4.5 percent, supporting further declines in China’s government bond yields, according to China Merchants Securities Co. analysts led by Xu Hanfei.

— With assistance by Tian Chen

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