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'Mother PBOC' Squeezes Traders Again as Money Market Tightens

  • Benchmark cash rate jumped most in two months on Tuesday
  • Upcoming maturities contributing to concerns: Guotai Junan

China’s money-market squeeze is back, with sovereign bonds beginning to feel the heat as the central bank keeps liquidity on a tight leash and concerns grow about a wall of fund maturities this month.

The yield on 10-year government debt has risen on all but two of the last 13 days to reach an almost two-month high, and the benchmark seven-day money-market rate surged the most since May on Tuesday. The People’s Bank of China -- seen to be pushing an official deleveraging drive with renewed vigor following a policy meeting last month -- refrained from boosting the supply on cash in the financial system for the third day in a row.

“If ‘Mother PBOC’ doesn’t love you, every day is month-end,” Guotai Junan Securities Co. analysts Qin Han and Gao Guohua wrote in a research note on Wednesday. “The tightness at the beginning of the month is unexpected. It may be because banks are granting loans aggressively at the beginning of the month, leading to a drop of lending in the interbank market, and to non-bank financial institutions.”

China’s deleveraging drive has pushed borrowing costs higher. President Xi Jinping lent fresh impetus to the campaign at the July 14-15 National Financial Work Conference, with the Xinhua News Agency citing him as saying that the authorities will actively prevent financial risk. The PBOC may raise interest rates further, and the 10-year sovereign bond yield will probably climb to 4 percent, Andre de Silva, head of emerging-market rates research at HSBC Holdings Plc, said in an interview in Hong Kong last week.

The Guotai Junan analysts pointed also to upcoming loan maturities, saying a combined 1.56 trillion yuan ($232 billion) will come due this month in reverse-repurchase agreements, Medium-term Lending Facility loans and treasury deposits. In addition, about 1.6 trillion yuan certificates of deposit will mature as well, they said.

The seven-day repo rate rose 14 basis points to 2.94 percent on Tuesday, before moderating to 2.87 percent as of 5:34 p.m. in Shanghai on Wednesday. The overnight funding cost rose four basis points to 2.86 percent, according to weighted average prices.

The yield on 10-year government bonds was little changed at 3.64 percent. The cost of one-year interest-rate swaps was steady at 3.45 percent, after rising to a three-week high of 3.46 percent on Tuesday.

“The PBOC wants to maintain a neutral position, but if it sees banks’ lending getting too aggressive, it could use open-market operations as a way to remind them not to be too aggressive,” said Chen Peng, fixed-income analyst at Fortune Securities Co. in Shenzhen.

— With assistance by Helen Sun

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