PBoC injects cash via 14-day reverse repo for 1st time since Feb as bonds sell-off
SHANGHAI: China’s central bank on Wednesday injected cash into money markets through 14-day reverse repurchase agreements for the first time since February amid signs of a sell-off in the bond market and growing worries on leverage.
The People’s Bank of China (PBoC) injected 90 billion yuan (US$13.55 billion) into money markets through seven-day reverse bond repurchase agreements (repos) and an additional 50 billion yuan through 14-day reverse repos on Wednesday, traders said.
Analysts say that in addition to signs of tightening liquidity in the fixed income markets linked to lower expectations on easing, regulators may be concerned about rising leverage in the bond market.
“The market read this (the 14-day queries yesterday) as the signal that PBoC may want to curb leverage in bond market as funding cost from 14-day reverse repo is higher than from 7-day and overnight reverse repo, which may increase costs for leverage,” wrote analysts from OCBC Bank in Singapore on Wednesday.
“The recent rally in bond fuelled by leverage on the back of stable short-end funding raise the concerns about potential asset bubble risk in China’s bond market.”
After a sharp rally in onshore bonds which pushed the 10-year Chinese treasury to seven-year lows in mid August, Chinese debt has sold off over the past week as doubts on further broad-based monetary easing have risen and investors took profits following the rally On Tuesday. Those doubts appeared to be confirmed as the central bank queried financial institutions on their demand for 14-day reverse repos for the first time since February, which the market took as a signal that further cuts to bank required reserve ratios were unlikely.
Chinese treasury futures promptly sold off on the news, with the price of the 10-year futures for December delivery falling 0.38%, the biggest move downward in over three months.
In bond market trading on Wednesday morning, Chinese five and 10-year treasury futures were both down 0.1%. The yuan was down 0.2% against the dollar while the benchmark CSI300 equities index was down 0.1%.
Traders told Reuters that the central bank also had queried on demand for 14-day reverse repos for Thursday, implying it may continue with the operations for now.
Some analysts said that only a sustained move higher in the seven-day or one-day repo rates would indicate the central bank was trying to curb leverage in the repo market.
“Unless we see a significant one-up move in the seven-day repo, I think we can conclude that the policy stance is unchanged for now,” said Julian Evans-Pritchard, China economist at Capital Economics in Singapore. “It would be odd that they would raise the repo rate at the moment given the current worries on the economy and investment.”
The volume weighted average of the benchmark seven-day repo rate, considered the best indicator of general liquidity in China, was volatile on Wednesday morning. It fell 13 basis points (bps) from the previous close in early trade only to recover to 2.44% by late morning, four bps higher than Tuesday’s closing average rate.
The volume weighted average 14-day rate was down five bps in early trade but up four bps to 2.74% by late morning. The one-day was down one basis point to 2.03%.
Maturing reverse repos will drain a net 405 billion yuan from the banking system this week.
The PBoC injected a net 15.5 billion yuan into the banking system last week. – Reuters