BofA: Stuck Between Growth Headwinds And Cautious Monetary Easing

Bank of America note that the “bond market was clearly underwhelmed by the combination of no MLF rate cut and the smaller scale RRR reduction - CGB yields rose by 2-6bp across the curve on 18 April. Facing external constraints from Fed tightening and associated portfolio outflow pressures, the PBoC will likely remain cautious when using broad-based easing tools and rely more heavily on targeted tools. Without a further cut to policy rates, we believe it would be difficult for 10-Year CGB to test January lows of 2.67%. On the other hand, any sharp rise in yields is also not warranted before the property market and consumption regain momentum. As for the curve, we maintain a steepening bias and continue to like long 3-Year CDB. The key is to watch overnight repo rates - if funding costs remain cheap, the front-end and belly of the curve should benefit from stronger interest in carry-trades.”