CNY Rates: Higher issuances, tighter liquidity


Bond issuance progress has been slow - Only 20% of projected full year net CGB issuances were completed in 1H.
Duncan Tan, Eugene Leow07 Jul 2021
  • Expect a 2H ramp-up in CGB and LGB issuances, to around CNY800bn net monthly average
  • CNY liquidity to tighten - 7D interbank repo rates to gradually rise within 2.25-2.50% range
  • Bias is for CNY swap and bond rates to moderately rise and curves to flatten
  • Implication for investors 1: We initiate a pay 2Y CNY NDIRS idea
Photo credit: AFP Photo


Issuances of Treasury (CGB) and Local Government bonds (LGB) bonds picked up in 2Q. However, progress towards full year financing needs remain slow. By 1H-end, only 20% of projected full year net CGB issuances were completed, around 7-9% below the run-rate of prior years. For net LGB issuances, 1H's completion rate of 43% is also lower than the 65% seen in 2020 and 50% seen in 2017- 2019.



The slow financing progress means that we will be getting a ramp-up in CGB and LGB issuances in 2H - We estimate 2H net issuances will average CNY368bn per month for CGB and CNY425bn per month for LGB. In aggregate, CGB and LGB net issuances will average CNY793bn per month in 2H, almost double of the CNY410bn per month across 1H.
In terms of timing, we think that bond issuance pressures will likely be more acute in 3Q, as local governments historically have tended to keep issuances lighter in 4Q. If we also include Policy Bank bonds (PFB), the recent May 2020 peak in bond issuances (CNY2484bn) could likely be surpassed in 3Q.



The expected ramp-up in CGB and LGB issuances should see CNY liquidity moderately tighten in 3Q. For most of 1H, CNY liquidity conditions had been benign, with 7D interbank repo (DR007) frequently fixing below the PBOC's 7D reverse repo rate (2.20%). Recently, however, there have been some signs of liquidity conditions getting tighter. DR007 rates had been rising, even before the June quarter-end where cash demand tends to be elevated. Post June quarter-end, in early-July, we expect DR007 rates to normalize lower alongside a technical pullback in cash demand. Thereafter, we think DR007 rates will begin a gradual upward trend through end-3Q, that is largely contained within a 2.25-2.50% range.



Our view of tighter CNY liquidity conditions ahead, largely a result of much higher bond supply in 3Q, is also contingent on PBOC staying liquidity-neutral in its OMOs (not net injecting or withdrawing large amounts of liquidity).



We acknowledge that PBOC did net inject some liquidity around June quarter-end, but think that it is more of a precautionary measure around quarter-end, than a signal that PBOC would be deviating from its liquidity-neutral stance. We expect PBOC to soon revert to its consistent OMO pattern of the last few months - Fully rolling over MLFs and conducting daily CNY10bn of reverse repo operations.

The implications of our tighter CNY liquidity view are that IRS/NDIRS rates and CGB yields would be biased moderately higher in 3Q (by 10-25bps). We are also likely to see CNY curves flatten, primarily led by front-end rates that tend to be more sensitive to fluctuations in liquidity and funding. Therefore, we are adding a new idea to pay 2Y CNY NDIRS (entry 2.523%, take-profit 2.70%, stop-loss 2.35%). This idea would allow us to position for tighter CNY liquidity in 3Q, and also express our flattening view when combined with our running idea of long 30Y CGB.






Report Links - 23-Mar-21 30-Mar-21 03-May-21 06-May-21 19-May-21 18-Jun-21


To read the full report, click here to Download the PDF.

Duncan Tan

FX and Rates Strategist - Asean
duncantan@dbs.com

Eugene Leow

Rates Strategist - G3 & Asia
eugeneleow@dbs.com


Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.