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J.P.Morgan: CNY Rate Rally Has Legs After Surprise PBoC Cut

CHINA RATES

J.P.Morgan note that “if investor hesitation to chase duration longs in H1 was principally rooted in disappointment over the PBoC’s policy under-delivery, this week’s rate cut marks an important catalyst for a shift in investor sentiment, and opens up room to extend duration exposure. We remain skeptical that rates can extend to 2020 lows as the MLF rate cut does not shift the medium-term outlook of repo rates grinding higher. That said, we still see merit in remaining long duration. It’s not unusual for yields to fall 2-3x of the increment of OMO rate adjustment in the month following a rate cut. If near-term tightening risks implied by the forward IRS curve gets fully priced out, it could lead to 25-30bp cumulative gain in CGB yields, meaning this week’s rally is just over half of the potential move. We stay positive on CNY rates and hold on to longs in 5-Year CGBs.”

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J.P.Morgan note that “if investor hesitation to chase duration longs in H1 was principally rooted in disappointment over the PBoC’s policy under-delivery, this week’s rate cut marks an important catalyst for a shift in investor sentiment, and opens up room to extend duration exposure. We remain skeptical that rates can extend to 2020 lows as the MLF rate cut does not shift the medium-term outlook of repo rates grinding higher. That said, we still see merit in remaining long duration. It’s not unusual for yields to fall 2-3x of the increment of OMO rate adjustment in the month following a rate cut. If near-term tightening risks implied by the forward IRS curve gets fully priced out, it could lead to 25-30bp cumulative gain in CGB yields, meaning this week’s rally is just over half of the potential move. We stay positive on CNY rates and hold on to longs in 5-Year CGBs.”