China's Yield Curve Steepest in 11 Months Ahead of Big Meeting

China is flushing its financial markets with cash ahead of key political meetings, and it’s resulting in a steeper yield curve.

The spread between one- and 10-year government bond yields has widened to 54 basis points, the most since March 2017, as ample liquidity conditions drag down yields on short-term notes more than longer-dated bonds.

The People’s Bank of China boosted open-market injections to 730 billion yuan ($116 billion) after the Lunar New Year holidays, spurring the one-month Shanghai Interbank Offered Rate, a key measure of liquidity levels, to drop to the lowest level since November.

The strong liquidity situation contrasts with the shortage seen during most of last year, when a combination of monetary and regulatory tightening drove funding costs higher, resulting in a flat -- and sometimes even an inverted -- yield curve.

The liquidity sweet spot will probably remain in place over the next couple of weeks as the Communist Party’s third plenary session and the National People’s Congress -- a meeting of the legislature held each year -- take place.

In fact, the yield curve is likely to steepen even further as China’s central bank typically seeks to ensure market stability during important political gatherings, according to Citic Securities Co.

“The PBOC is managing interbank liquidity preemptively,” said Ming Ming, Citic Securities’ Beijing-based head of fixed income research. “Hence, the relatively loose liquidity conditions could end after the meetings end.”

— With assistance by Helen Sun

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