Goldman: Near-Term CGB Repricing Risk Rising

Goldman Sachs note that “despite the announcement of multi-year ultra-long term CGSB issuance plan, long-term CGB yields have moved notably lower year-to-date.”

• “Yield-seeking investors have been moving into bond funds on the hopes of further monetary easing and low expectations of domestic growth/inflation.”
• “We retain a receiver bias across the curve over the medium term, but think the risk of a correction at the long end is high, so would wait for better prices to re-engage in long-term CGBs.”
• “Given deflation fears and ongoing property/LGFV deleveraging, we expect China's interest rates will drift lower.”
• “That said, ultra-long CGB issuance could significantly impact front-end liquidity.”
• “The market reaction in Aug-Sep 2023 could serve as a comparable benchmark to gauge the upside risks to CGB yields.”
• “For investors with long-term CGB positions, paying short-term IRS (1y/2y) would provide some protection against government bond supply shocks.”