PBOC announces bond issue – DBS

The People’s Bank of China (PBOC) announced this week that CGB would borrow from primary dealers. The central bank reportedly identified two potential dealers yesterday. The policy shift echoes the PBOC governor’s previous talk of deepening monetary policy tools through CGB transactions, notes Samuel Tse, a DBS economist.

PBOC still aims to stabilize exchange rates

“The market interprets long-term bond borrowing as a prelude to bond sales to slow the CGB rally. From an FX perspective, higher CGB yields and a narrower spread against their UST counterparts could help ease pressure on CNY exchange rates. It is worth noting that the PBOC still aims to stabilize exchange rates to prevent capital outflows.”

“Our core strategy of increasing the slope remains in place. The potential sell-off in long-term bonds is consistent with our view that 10-year yields should stabilise in the near term. The CGB 10-year yield rebounded to 2.27% this week after hitting an all-time low of 2.18% following the announcement.”

“However, short-term bond yields could fall further as monetary easing remains on track. A further round of risk reserve rate cuts is likely in the third quarter amid an uneven recovery and slowing credit growth.”