Nomura Maintains Pay 5y NDIRS
The Japanese bank maintains its pay 5y NDIRS recommendation in light of recent China rate moves/announcements.
Nomura: "We maintain pay 5y NDIRS with moderate conviction. China rates moved 2-4bp higher and the curve steepened after the PBoC announced the temporary overnight repo/reverse repo operation. This should set a range of 1.60-2.30% for DR001. After the 10bp rate cut in August 2023, DR001 has mostly stayed within the range. Looking over a longer history since 2014, the DR001 broke below the lower end for many more days than it broke above the upper end. The resumption of repo operations, which were last conducted in November 2014, also sent a somewhat hawkish signal. In our view, this new interest rate corridor should set a floor for DR001, which would then discourage market leverage (borrow via cheap funding and invest in long-end CGBs), and prevent the US-China rates differential from widening further (on currency and capital outflow risk).
We remain pay 5y NDIRS (shifted from 3y last Friday) alongside a 1s2s steepener trade. The PBoC’s intervention (on DR001 and potential sale of medium- to long-term CGBs) and a likely pickup in bond supply in Q3 should support a move in China rates higher from current levels. That said, we maintain a moderate conviction in pay rates, as macro concerns continue to linger despite attractive valuations."