Goldman Sachs view “active CGB trading as part of the PBOC's regular open market operation toolbox, rather than QE.”
- They suggest that active CGB trading may mean that “policymakers gain better control of market interest rates, and thus reduce the risk of unintended over-tightening/loosening of financial conditions.”
- They also believe “the upcoming acceleration of government bond issuance implies limited room for further decline in market rates in the near term.”
- The recent policymaker communique on this front shouldn't be a surprise to MNI subscribers. A recent exclusive from our Beijing team (published on April 11) noted that the PBoC will “continue to monitor the longer-dated Chinese government bond market, adding supply and control over leverage to help guide 10-Year CGB yields closer to the present 2.50% one-year MLF rate.”
- Goldman go on to flag that “paying front-end IRS would provide some protection against tighter front-end liquidity conditions due to the likely large volume of government bond supply in the coming months.”
- Finally, they take profit on their long 1-Year CGB trade recommendation for a potential gain of 60bps (entered on 10 November ‘23).
- This comes after CGB yields moved off cycle lows following Tuesday's comments from policymakers.
Fig. 1: China 1-, 10- & 30-Year Yields (%)
Source: MNI - Market News/Bloomberg