Chinese central bank’s move to cool bond rally may fall flat, analysts say
- The PBOC’s efforts to defend declining bond yields may not change things structurally and will not have a long-term impact, Pinebridge’s Omar Slim says
The Chinese central bank’s move to use overnight policy tools to tame a rally in government bonds will have little long-term impact, as investors are still pessimistic about the country’s economic recovery, according to analysts.
The People’s Bank of China’s (PBOC) latest efforts on Monday to defend declining bond yields pushed up 10- and 30-year Chinese government bonds by 1.5 and 1.0 basis points to 2.29 and 2.52 per cent, respectively, according to official data. However, the yields are hovering around record lows as investors continue to bet on these risk-free bonds.
The central bank will conduct temporary repos and reverse repos depending on the market conditions to “keep banking system liquidity ample” and “make market operations more efficient”, the PBOC said in a statement on its website. The interest rates on the temporary repos and reverse repos will be, resepctively, 20 basis points below and 50 basis points above the seven-day reverse repo rate, which currently stands at 1.8 per cent.
The new measure will help the central bank contain volatility in short-term rates, but “it remains uncertain whether it will help the PBOC bolster long-term Chinese government bond [CGB] yields”, according to a Nomura research note on Monday.
Central banks use reverse repos to inject cash into the banking system by purchasing securities from commercial banks with an agreement to sell them back in the future, whereas a repo is used to withdraw funds from the market.
