China’s bond traders have been lulled into a stupor by promises of stimulus that have failed to excite investors and market signals suggest next week’s key central bank decision will do little to shake them into action.
(Bloomberg) — China’s bond traders have been lulled into a stupor by promises of stimulus that have failed to excite investors and market signals suggest next week’s key central bank decision will do little to shake them into action.
Swings in China’s rates market have slowed to a crawl, with the benchmark yield moving in the narrowest range in 15 months this week, despite the world’s second largest economy reporting disappointing exports data and entering deflation.
Next week offers the potential catalyst of the People’s Bank of China showing it’s willing to loosen policy further — it has to manage the largest amount of one-year loans maturing since January. And keenly-watched economic indicators including retail sales, fixed-asset investment and July loan growth are also expected.
But expectations for a significant pick up in the rates market are low and the best that strategists like those at Morgan Stanley can come up with is shifting to a neutral view.
“Our conviction on rates hasn’t been as high as what we have regarding our yuan view,” Min Dai and Gek Teng Khoo wrote in a recent note. “On one hand, we believe that China rates have already bottomed and the PBOC is unlikely to cut rates again. On the other hand, pork prices remain subdued in China and headline inflation is likely to be negative for the next few months.”
Subdued sentiment and a lack of direction in markets are just some of the challenges China investors are facing in dealing with the country’s bumpy recovery this year. A series of piecemeal stimulus measures and a mixed economic picture has helped encourage a wait-and-see approach.
The PBOC has also been ambiguous in its tone on interest-rate comments, which hasn’t helped. While the central bank has reassured multiple times to the public that China has ample room for monetary easing, it has also hinted at caution against excessively low rates.
A warning against excessive arbitrage trades in the money market that are usually fueled by low funding costs also adds risks of PBOC pushback.
Confirmation of an even weaker economy or additional monetary easing are necessary to trigger substantial declines in China rates, according to Li Yishuang, analyst at Cinda Securities. That is more likely to materialize late in the third quarter, he said.
China yields may fluctuate in a range for some time and “we would advise investors to stay flexible at this juncture,” he said.
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