Repo rates would stay low at least for this month as weak demand for credit has left the cash with “nowhere to go,” said Albert Leung, strategist at Nomura International in Hong Kong. Moreover, the carry trade return, as measured by the spread between 10-year yield and seven-day repo rate, stands near 130 basis points, about the highest in a year.
“The window to long China bonds has already opened even without an actual rate cut, as the central bank will show more tolerance of the lower repo rates,” Li Yishuang, analyst at Cinda Securities Co., wrote in a note.However, bonds could face risks from an increased emphasis on fiscal support to boost the economy.
“In a scenario where more fiscal support is needed, China may consider funding it with special treasury bonds – as it did in 2020,” said Stephen Chiu, Asia FX and rates strategist at Bloomberg Intelligence in Hong Kong. China’s 10-year bond yields steadied Thursday after rising for the first time in three days in the previous session as data showed factory and consumer prices roseChinese Premier Li Keqiang at a State Council Meeting on Wednesdayofficials to use fiscal and monetary policies to stabilize employment and the economy. PBOC Vice Governor Chen Yulu said the central bank has guided loan interest rates to decline.
Bond traders are now watching for possible PBOC action on Monday when 100 billion yuan of policy loans are due. Twelve out of 25 economists and analysts expect a cut to the one-year medium-term lending facilities rate, according to a Bloomberg survey as of Thursday.