J.P.Morgan: Backdrop More Favourable For CNY Rates

J.P.Morgan note that “downbeat economic data and today’s surprise MLF rate cut set up an incrementally more favorable backdrop for CNY rates. Although the outlook for further rate cuts remains unclear, markets should at least become more confident in pricing out excessive policy pessimism baked into the rate curve. Of note, the front-end IRS curve is currently pricing in the sharpest tightening pressure since 2020. As we have discussed previously even before today’s rate cut surprise, such pricing of near-term tightening risks looked a bit misplaced. If the investor hesitance to chase duration longs so far is principally rooted in disappointment over the PBoC’s policy under-delivery in H2, today’s rate cut marks an important catalyst for a shift in investor sentiment, and opens up room to extend duration exposure. CNY rates have reacted positively to today’s rate cut with a broad-based rally of 6-13bp but we think this is not the end and the move may have legs led by outperformance of front and intermediate yields. We stay long 5-Year CGBs.”