China Bonds Advance on PBOC’s $16 Billion Liquidity Injection

(Bloomberg) -- China’s government bonds are set for their biggest weekly advance since July after Beijing boosted its liquidity injection twice in three days and global bonds rallied on waning rate-hike bets.

The yield on China’s 10-year sovereign bond dropped two basis points to 2.90%, extending this week’s decline to seven basis points. The move came after the People’s Bank of China increased its injection of short-term cash to 100 billion yuan ($16 billion) Friday after boosting it to 50 billion yuan earlier in the week.

Fueling the rally are bets that China’s central bank will join global peers in prioritizing stimulating growth over curbing inflation as a slowdown in the nation’s property sector and rising energy costs weigh on the economy. Global bonds extended gains Thursday as the Bank of England surprised markets by keeping interest rates unchanged, after the Federal Reserve and Reserve Bank of Australia signaled patience on rate hikes this week.

“The PBOC appears to have opted for the more flexible open-market operations instead of the long-term liquidity injection” to manage cash supply, said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank Ltd. “Overall, the liquidity conditions remain largely ample without a structural gap to fill.”

The PBOC typically injects 10 billion yuan of cash at the start of the month before increasing it toward month-end to meet seasonally high demand for funds. It broke that pattern by increasing its cash injection to 50 billion yuan on Wednesday. That’s because lenders need to repay a record 1 trillion yuan of medium-term policy loans coming due while also setting aside cash to buy debt sold by local governments.

“The local government bond issuance has fallen behind targets for the first three quarters so a short-term surge in bond supplies may distort the seasonality of liquidity demand,” said Peiqian Liu China economist at Natwest Markets Plc. 

Friday’s liquidity operation resulted in a net drainage of funds after considering maturities. Still, the higher gross addition is a sign Beijing is willing to maintain ample liquidity, which is supporting market sentiment. Turnover of all repo contracts surged to over five trillion yuan on Thursday, the highest since May 2020, amid the central bank liquidity operations. 

The overnight repurchase rate, an indicator for interbank borrowing costs, was little changed at 1.89% after falling as much as three basis points earlier. 

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