Goldman Recommend Paying 5-Year ND-IRS

Late on Friday Goldman Sachs noted that “China is reopening more rapidly than anticipated after three years of zero-Covid policy, this led us to revise up our ‘23 GDP growth forecast.”

• “After a sharp repricing due to a Covid policy repivot, CNY IRS rates have drifted lower since mid-December, lagging the performance of other assets exposed to China growth expectations.”
• “The decline was primarily driven by weak economic activity from surging Covid infections and an accommodative monetary policy stance in the aftermath of WMP redemption.”
• “The overnight repo funding rate for depository institutions dropped to below 0.5%, a historical low. However, we think the dip is likely to be temporary, and CNY IRS rates might move higher on an early rebound of economic activity after the Lunar New Year (LNY).”
• “China’s reopening “exit wave” has been progressing faster than many expected. Local health committees, such as Zhejiang and Sichuan, reported infections would peak in early January. As a result, LNY consumption may rebound significantly from 2022 levels.”
• “Moreover, our expectation of economic rebound allows room for monetary policy normalisation in the event of strong economic activity.”
• “Although policy communications have been consistently pro-growth in December, most measures were in the form of property policies and regulatory policies.”
• “As such, we recommend paying CNY 5Y ND-IRS (entry 2.77%, target 3.30%, stop-loss 2.50%). This trade incurs a negative carry of 2bp per month.”