PBOC Tests Demand for Two-Month Reverse Repos for First Time
(Bloomberg) -- China’s central bank is said to have gauged demand for 63-day reverse repurchase agreements for the first time ever.
The People’s Bank of China tested demand for the repos -- open-market operation tools that add cash to the financial system -- on Thursday, according to a trader at a primary dealer. The move came amid a tumble in sovereign debt, with the 10-year yield rising to the highest since 2014.
“The PBOC may have noticed market volatility was relatively big, and it’s using this to send a signal that liquidity won’t become too tight and that investors shouldn’t be too worried," said Xu Hanfei, chief bond analyst at China Merchants Securities Co. "Also, it could be trying to get prepared for higher demand for cash from financial institutions at the end of the year.”
Chinese bonds have come under pressure this year amid an official deleveraging campaign and signs of economic expansion. Losses accelerated last week after People’s Bank of China Governor Zhou Xiaochuan voiced concern about high borrowing levels and signaled that growth could beat expectations.
The PBOC uses reverse-repurchases contracts to offer mainly short-term loans to banks, with one-week, 14-day and 28-day contracts the most common. Depending on the size of the funds added and the amounts that mature, the operations can result in either a net injection or withdrawal of cash from the financial system.
“The PBOC is trying to meet demand for year-end cash, and not easing,” said Ming Ming, head of fixed-income research at Citic Securities Co. “If it injects funds via 63-day reverse repos, it will likely significantly reduce the amount of cash added through 14-day and 28-day contracts. So it doesn’t have to conduct open-market operations that often.”
The 10-year sovereign bond yield briefly crossed 3.8 percent on Thursday before settling little changed at 3.79 percent. The five-year yield advanced 1 basis point to 3.82 percent.
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