A steepening of the onshore CGB curve may take a pause. The 10Y CGB yield retreated to 1.85% from 1.91% yesterday after the week-long National Holiday, suggesting the recent sell-off may be coming to an end. Despite some rotation from bonds to equities (see: China/HK markets: Liquidity driven performance and rotation from bonds to equities), several factors are keeping long-end yields steady.
First, the market appears to have largely priced in the upcoming issuance. Only 15.4% of the Treasury Bond net issuance quota remains unused, while 97% of the ultra-long special bond quota has already been consumed. Likewise, only 12% of the local government bond quota is expected to be utilized this quarter.
From a macro perspective, inflation remains weak despite the anti-involution campaign. The market expects next week’s CPI and PPI releases to record another month of YoY contractions in September. Prolonged disinflation should help anchor yields of long-end and the belly.
At the short end of the curve, which is more sensitive to liquidity conditions, yields should remain relatively stable. DR007 and R007 have already fallen to around 1.50%, close to the 7-day reverse repo policy rate of 1.40%. Further downside appears limited, as the PBoC is likely to cut the LPR and 7-day repo rate by only another 10bps this year. Policymakers may refrain from deeper cuts to protect banks’ net interest margins.
Likewise, CNH rates are expected to remain anchored. The PBOC should have largely done with its bill issuance in Hong Kong this year. The central bank has issued RMB 255 billion YTD, compared with RMB 275 billion in 2024. The central bank may not lean on additional issuance amid stable CNY and CNH exchange rates. With the Fed on track to deliver two more rate cuts this year, the CNH spot and 12M forward remain well supported around 7.10 and 6.90 levels, respectively. Meanwhile, the opening of onshore repo market will help easing the offshore liquidity needs, thereby closing the onshore-offshore spread. 
Topic
Explore more
E & S Macro StrategyGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates & Digital Assets)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). 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.
[#for Distribution in Singapore] 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. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. 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. 11th Floor, The Center, 99 Queen’s Road Central, Central, 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.