HALISTER1: PBOC Signals Prudent Policy to Pressure Debt Markets, RBS Says

PBOC Signals Prudent Policy to Pressure Debt Markets, RBS Says

(Bloomberg) -- PBOC resuming 14-day reverse repo is to bring “adjustment pressures” on China’s bond market in the near term, as recent rally is built on rapid accumulation of leverage via aggressive short-term borrowing at money market, RBS chief Greater China economist Harrison Hu writes today.
  • PBOC is sending out a “prudent policy signal,” and indicating it will defend money market rates at current levels without rate or RRR cuts
  • Marginally lifting banks’ weighted average short-term funding costs will force lenders to exit from their leveraged positions
  • Low probability of a disruptive adjustment in bond market, given resuming 14-day reverse repo a minor fine-tuning move
  • Risk of an overreaction does exist because banks may initiate bond sell-off and/or hoard liquidity to force PBOC to keep easing, as they are addicted to cheap and abundant liquidity
  • NOTE: PBOC sells 50b yuan 14-day reverse repo today at 2.4%, first time since Feb. 6
    • Yield of China 5-yr, 10-yr government bonds little changed today at 2.570% and 2.765% respectively
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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PBCZ CH (People's Bank Of China)

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Harrison Hu (Royal Bank of Scotland Group PLC)

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