China's surging bonds show angst about a cash crunch is easing

Beijing - China’s liquidity indicators are flagging that concerns over a cash crunch come end-June may be overdone.

Cash injections from the central bank have helped ease anxiety that Beijing’s deleveraging drive will make China’s traditional mid-year liquidity squeeze even worse this year. Ten-year sovereign bond yields slumped the most in 2017 on Monday, and interest-rate swaps are close to their lowest level since March.

Meanwhile, the three-month Shanghai Interbank Offered Rate has fallen in the past few days from its highest point in more than two years.

The People’s Bank of China pumped a combined 360 billion yuan of funds into the financial system through open-market operations on Monday and on Friday, the most since January.

“The market still has a bull market mentality - investors think the central bank will always ease when there’s stress, and they pushed bonds higher as policy makers did what they expected with the liquidity injections,” said David Qu, a markets economist at Australia & New Zealand Banking in Shanghai.

“The surge won’t be sustainable, and bond prices will be volatile in the future. The market will continue to expect the PBOC to ease, while the authorities seek to deleverage.”

Read Fin24's top stories trending on Twitter: Fin24’s top stories