CHINA
- When the PBOC halted purchases, they cited a shortage of bonds to purchase in their open market operations and stated that they would re-instate purchases ‘at a proper time.”
- The bond purchase policy is part of the programs aimed at easing the monetary environment, specifically for regional governments as they refinance existing debt.
- As some data shows signs of stability in the economy and hopes abound for a better year for housing, the key to authorities is to manage the bond market’s next move, especially when retail investors are heavily invested.
- Investors concerned about the malaise in property have invested heavily in the bond market and authorities would be worried about bubble like conditions, or damaging consumer sentiment were bond yields allowed to rise rapidly.
- As housing shows some signs of ‘green shoots’ – New House prices declines have improved for five consecutive months and Used House price decline improvements have improved for 3 months - indicating that investor sentiment has likely bottomed following the various stimulus measures.
- Additionally, over the weekend China's January CPI y/y moved higher suggesting that the domestic economy may have found a bottom and that 2025 could present upside potential for the economy as stimulus measures' impact start to appear.
- This leaves authorities with a careful environment to manage bond yields with the path of least resistance being to keep yields steady.
- In that context when we consider the CGB vs JGB relationship, the anticipated tightening in CGB yields appears done for now as CGB yields have the potential to stay around these levels in the near term.
- This presents the opportunity to return the CGB overweight to neutral, freeing up capital for other opportunities.
- The Bank of Japan has recently raised rates to 0.50% and it is forecast that the terminal rate for the BOJ is 1.00%-1.50%.
- Data is supportive of that forecast with positives from wages growth and household expenditure.
- Equally the rhetoric from BOJ voting members (particularly the governor) remains hawkish, suggesting that the pathway for yields in Japan for now, likely remains higher.
- With 39bps of hikes priced in currently, it seems possible that JGB yields could move higher from here leaving JGBs to be the main driver for this strategy at a time when CGB yields could do very little.
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