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China RRR Cut Possibility Gains Traction

ASIA RATES
  • INDIA: Yields lower in early trade. Indian bonds saw their best week since April last week, buoyed by strong buying from mutual funds and foreign inflows as INR strengthened. 10-Year yields dropped over 10bps last week, the biggest weekly drop since April. The move higher in bonds was extended after a strong auction on Friday, the RBI sold INR 260bn of bonds as planned with cut off yields lower than expected. Bonds are expected to continue to rise today, oil has extended losses in early trade after Saudi Arabia announced it will cut oil prices for sales to Asia next month by more than double the expected amount days after OPEC agreed to go ahead with production increases. Lower oil prices assuage inflation worries which in turn reassures markets that the RBI will refrain from tightening in the near term after investors were spooked by some hawkish leanings in the latest RBI minutes.
  • SOUTH KOREA: Futures lower in South Korea, the move in the 10-Year takes it below its 50-DMA at 127.45 for the first time since June 29. Equity markets under some pressure, down around 0.1% even amid a general risk on tone in the region. Short-end US/SK spreads have widened, the 2-Year spread at 134.83bps after a weak US NFP number cast doubts on taper timing from the FOMC.
  • CHINA: The PBOC drained a net CNY40bn of liquidity from the system today, gradually withdrawing the additional liquidity added at August month-end. Repo rates are higher, but within recent ranges. The overnight rate and 7-day rate are no longer inverted after the overnight rate dropped at the end of last week. Futures are higher, talk of an RRR cut gains traction with another piece in state media discussing the possibility.
  • INDONESIA: Yields lower with some curve steepening seen. Indonesia will again review its Covid-19 restrictions today after loosening curbs last week, as daily cases continue to ease. The country declared 5,403 new infections on Sunday, the lowest count since June 3. Elsewhere, it was announced on Friday that Bank Indonesia and the government are planning to issue "inclusive bonds" as financing instrument for micro & SME's. It was also announced on Friday that Indonesia is cutting the income tax rate on bond interest to a record-low 10% for domestic investors, matching the foreign investor rate.

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