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Goldman Take Profit On Long CGB Trade Following Policymaker Comms Matching MNI Reports

CHINA RATES
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Goldman Sachs view “active CGB trading as part of the PBOC's regular open market operation toolbox, rather than QE.”

  • They suggest that active CGB trading may mean that “policymakers gain better control of market interest rates, and thus reduce the risk of unintended over-tightening/loosening of financial conditions.”
  • They also believe “the upcoming acceleration of government bond issuance implies limited room for further decline in market rates in the near term.”
  • The recent policymaker communique on this front shouldn't be a surprise to MNI subscribers. A recent exclusive from our Beijing team (published on April 11) noted that the PBoC will “continue to monitor the longer-dated Chinese government bond market, adding supply and control over leverage to help guide 10-Year CGB yields closer to the present 2.50% one-year MLF rate.”
  • Goldman go on to flag that “paying front-end IRS would provide some protection against tighter front-end liquidity conditions due to the likely large volume of government bond supply in the coming months.”
  • Finally, they take profit on their long 1-Year CGB trade recommendation for a potential gain of 60bps (entered on 10 November ‘23).
  • This comes after CGB yields moved off cycle lows following Tuesday's comments from policymakers.

Fig. 1: China 1-, 10- & 30-Year Yields (%)

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Goldman Sachs view “active CGB trading as part of the PBOC's regular open market operation toolbox, rather than QE.”

  • They suggest that active CGB trading may mean that “policymakers gain better control of market interest rates, and thus reduce the risk of unintended over-tightening/loosening of financial conditions.”
  • They also believe “the upcoming acceleration of government bond issuance implies limited room for further decline in market rates in the near term.”
  • The recent policymaker communique on this front shouldn't be a surprise to MNI subscribers. A recent exclusive from our Beijing team (published on April 11) noted that the PBoC will “continue to monitor the longer-dated Chinese government bond market, adding supply and control over leverage to help guide 10-Year CGB yields closer to the present 2.50% one-year MLF rate.”
  • Goldman go on to flag that “paying front-end IRS would provide some protection against tighter front-end liquidity conditions due to the likely large volume of government bond supply in the coming months.”
  • Finally, they take profit on their long 1-Year CGB trade recommendation for a potential gain of 60bps (entered on 10 November ‘23).
  • This comes after CGB yields moved off cycle lows following Tuesday's comments from policymakers.

Fig. 1: China 1-, 10- & 30-Year Yields (%)

Keep reading...Show less