China’s government bond prices and sovereign bond futures fell sharply on Wednesday as benchmark 10-year government bond futures fell 0.8% to 94.62, as yields on China 10-year bonds rising 6bps to 3.355%,
extending January’s climb to 33bps, the biggest monthly increase since
since October 2010, following a surprise move by the central bank to raise interest rates on a type of special emergency liquidity loans to certain financial institutions.
In a surprise announcement late Tuesday, the People’s Bank of China said it raised the interest rate on loans to 22 financial institutions via the medium-term lending facility, a new liquidity tool in place since 2014. While the central bank effectively injected another 245.5 billion yuan into markets, it also raised the interest rates on the two sets of loans, which are six months and one year in duration, by 10 basis points to 3.1% and 2.95% respectively.
As the WSJ adds, the move was widely viewed by investors as an effective rate increase intended to aid Beijing’s efforts to rein in debt-fueled speculative investments, and according to Goldman, the modest rate hike was a telegraphing of an implicit form of tightening. Still, as the chart below shows it is not exactly clear how making a liquidity facility, which has a record notional outstanding, fractionally more expensive is tightening.
According to Reuters, this was the PBOC’s first increase in the MLF interest rate since its debuted the liquidity tool in 2014, and first time it has raised one of its policy interest rates since July 2011. The last time the PBOC adjusted interest rates on MLF loans was in February 2016, when it lowered them.
One trader at a Chinese bank in Shanghai reckoned the rate increase was “bad news” because it raised the cost of funding at a time of seasonally tight liquidity heading into the week-long New Year holiday.
“The MLF loans meet market demand for funds, but the cost is going higher… The central bank is still aiming to reduce leverage at financial institutions,” she said.
Economists at ANZ said the PBOC will likely maintain generally supportive liquidity conditions, but at higher rates as it looks to prevent potential financial risks. Earlier on Tuesday, some Chinese media had reported credit growth could surge again in January, after higher-than-expected bank lending growth in December.
“With MLF rates moving higher, the market may view this as a signal that either the PBOC wants to have a steeper curve, or a higher curve across the tenors,” ANZ said in a note after the rise increase.
While it is unclear if a 0.1% increase in what is effectively an emergency liquidity loan is equivalent to monetary tightening, for now China’s traders are selling first and asking questions later. Should the selloff in the bond sector accelerate, it could have significant implications across all Chinese risk assets, and potentially lead to a slowing in China’s debt creation machine which for the past two years has been the primary driver behind the global growth impulse.
via http://ift.tt/2jR1JXX Tyler Durden