Bond Traders Wait Again And Again For China to Inject More Cash

(Bloomberg) -- Waiting for China’s central bank to deliver on liquidity injections is turning into a daily event for bond traders.

The central bank said in April it would add cash to the financial system with a targeted monetary tool at the beginning of each quarter. It followed through with that in April and July, priming bond traders to expect the same this month. But it’s the last day of October, and markets are still waiting.

Meanwhile, the People’s Bank of China has refrained from rolling over reverse repurchase contracts that matured in the past four sessions, citing ample liquidity. This has effectively drained 560 billion yuan ($79 billion) from the banking system this week, while the yield on 10-year government bonds has soared and the cost on one-year interest rate swaps is at the highest since April.

What gives? Multiple theories have surfaced as to why.

The central bank may be planning to replace maturing medium-term loans next week with the targeted facilities, like it had done so in July, said Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd., adding that another round of such loans was maturing next week. More than 403 billion yuan of loans come due Tuesday.

Or it could be that policy makers are planning a rate cut or an injection of a larger magnitude that would require approval from central bank governor Yi Gang, who is currently attending a major Communist Party meeting, according Xing Zhaopeng, a markets economist at Australia & New Zealand Banking Group Ltd. in Shanghai.

Another view is that the week-long holiday at the start of October has pushed back the PBOC’s schedule.

China’s 10-year bond yield has risen almost 10 basis points in the six days through Thursday, while the cost on one-year interest rate swaps holds at 2.89%.

--With assistance from Tian Chen.

To contact Bloomberg News staff for this story: Livia Yap in Shanghai at lyap14@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins

©2019 Bloomberg L.P.

With assistance from Bloomberg