Curve Bear Flattens

The Chinese yield curve has bear flattened today, with 2s running ~4.5bp cheaper, while 30s are ~3.5bp cheaper on the day. The easy explanation would simply be to point to the PBoC starting to drain the liquidity provisions provided ahead of the turn of the calendar year via today’s OMOs, but 7- & 14-day repo rates have backed off during the session. That would suggest that stronger than expected Caixin manufacturing PMI data and spill over from Monday’s weakness in the U.S. Tsy space are the more relevant drivers when it comes to today’s cheapening.

• It is worth remembering that today’s cheapening comes after a year-end rally for the CGB space, with that period seeing bonds benefit from the aforementioned OMO liquidity injections and increasing hope for deeper PBoC easing.
• There has been plenty of airtime given to broader domestic liquidity gaps and offshore funding needs for property developers during the month of January, but the pro-growth turn from Chinese policymakers during the backend of ’21 should mean that domestic liquidity remains somewhat ample (although offshore financing needs for developers will remain an area to watch).