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Citigroup, Morgan Stanley Say Bets on China Liquidity to Unwind

  • Further drop in interbank repo rates may be limited: Citigroup
  • Morgan Stanley tells clients to bet on flatter 1-5 year curve

The relentless decline in China’s short-term rate swaps fueled by bets on persistently abundant liquidity may be about to end, according to Citigroup and Morgan Stanley strategists, who recommend clients to position for a flatter curve.

The difference between one- and three-year non-deliverable China interest-rate swaps expanded to 30 basis points Tuesday, the widest since 2017. Driven by low funding costs for banks during the pandemic, the spread is approaching the top of the range since China adopted the current monetary framework and started to set policy rates on a series of open-market tools as anchors in 2016, according to Citigroup.