China bonds steady as investors mull stimulus signals

(ATF) The ATF China bonds indices posted another quiet day on Tuesday, with just two of the gauges closing in slightly negative territory, even amidst investor worries of tight liquidity within the banking system.

ATF ALLINDEX Financials Index slid 0.07%

The ATF China Bond 50 index, the flagship measure, lost 0.05% while the ATF ALLINDEX Financials slipped 0.07%, to close at 106.77. Both these indices dropped largely as a result of a coupon payment by China Cinda Asset Management.

ATF ALLINDEX Corporates climbed 0.02%
ATF ALLINDEX Local Governments Index added 0.03%

Meanwhile, the ATF ALLINDEX Corporates and Local Governments gained 0.02% and 0.03% respectively, while the ATF ALLINDEX Enterprise gauge closed flat at 102.38.

The People’s Bank of China (PBoC) allowed 120 billion yuan ($17bn) of seven-day reverse repurchase agreements to expire on Monday, after 500bn yuan of Medium-Term Lending Facility (MLF) funds were made available last week, giving the market cause for concern, according to a research report by Trading Economics. The PBoC injected 200bn yuan into the market on Monday via the MLF.

The move was in addition to the PBoC’s seven reverse repo open market operations since 3 June totalling 650bn yuan in a bid to stabilise liquidity. On Tuesday, however, the central bank decided not to conduct reverse repo operations, estimating that liquidity was adequate. China’s 10-year bond yield rose to 2.86%, reversing a week-long decline that ended Friday.

Meanwhile, the yield on China’s one-year bond closed at 2.08%, down from a high of 2.10% last week after an 85-basis point surge over a 1-month period. The PBoC had decided not to further lower the cost of its short-term loans to banks, causing the 1-year bond yield to spike, as reported.

The move was designed to discourage investors from using stimulus money for arbitrage trades by raising rates at the front end of the yield curve and redirect funds to the real economy.