CHINA: The Control of Liquidity is Pushing Yields Gently Higher
- On January 10 the PBOC paused their policy of purchasing government bonds in place to support liquidity.
- That week, the close for the CGB 2yr hit a low of 1.03% and the 10YR 1.59%
- Since that time two major themes have become evident. The provision of significant liquidity leading into the earlier than usual Lunar New Year holiday, and the gradual withdrawal since.
- A controlled rise in the Overnight interbank rate has accompanied this withdrawal of liquidity post Lunar New Year.
- This has resulted in a gradual, measured ascent of bond yields with the CGB 2yr today at 1.45% and the CGB 10yr at 1.76%.
- As China’s top legislature begins its annual parliamentary meeting on March 5, expectations for policy announcements are high.
- With the policy setting for monetary policy deemed accommodative going forward, China could cut its policy rates early next month.
- The controlled rise in interest rates comes at a time when demand for bonds (and bond funds) has been growing, particularly from retail investors concerned about the property market. Notwithstanding the recent rebound in local equities, which could also be drawing away funds from the local bond market.
- A cut in interest rates could see bond yields move lower again and the gradual rise in yields in advance of monetary policy changes, appears a sensible policy intervention to avoid a bubble arising in bonds.
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