China: Bond market sentiment stabilized – OCBC Bank

Analysts at OCBC Bank note that sentiments in the Chinese bond market stabilized in November, on hopes of a reduced bond supply by China Development Bank after a bond swap to reduce duration, and a cancelation of its 10-year issuance.

Key Quotes

“10-year government bond yield retreated to below 3.9%. The PBoC also announced new regulations to further differentiate good quality asset management products from the bad. In the long run, we expect the demand for assets such as government bond and policy bank bonds to increase. Near term, however, the unwinding of good quality, liquid assets in response to the new regulations may have pushed these yields to multi-year highs.”

“In Hong Kong, one-month HIBOR topped 1% last week for the first time since late 2008 due to year-end effect and banks’ preparation for Fed’s Dec rate hike. We remain wary that tight liquidity condition may persist until end of this year. The possibility of one-month HIBOR testing 1.1-1.2% range cannot be ruled out. The uptrend in HIBOR may hit some corporate loan demand and mortgage loan demand.”

“Apart from short term liquidity considerations, expect little discretionary impetus from the PBoC over the CFETS RMB Index or the USD-CNY midpoints into the end of the year. Stability remains the operative word for PBoC at this juncture, and our house view remains for a stable CNY NEER into 2018. As a result, expect the USD-CNY and USD-CNH rate to continue to reflect fluctuations in the basket’s constituent currencies.”