The People’s Bank of China (PBOC) announced CGB borrowing from primary dealers earlier this week. Reportedly, the central bank identified two potential operators yesterday. Such policy change echoes the PBOC Governor's earlier speech on deepening monetary policy tools through CGB transactions, DBS Economist Samuel Tse notes.

PBOC still aims to stabilize exchange rates

“The market interprets the long-end bond borrowing as a prelude to bond sales to cool the CGB rally. From a FX perspective, higher CGB yields and a narrower spread against UST counterparts could help alleviate pressure on CNY exchange rates. Note that the PBOC still aims to stabilize exchange rates to forestall capital outflow.”

“Our core strategy of steepening is still at play. Potential long tenor bond selling matches our view that 10Y yields will likely stabilize in the near term. The 10Y CGB yield once rebounded to 2.27% this week after hitting the historical low of 2.18% following the announcement.”

“However, short-end CGB yields could head south further as monetary easing is still on the cards. Another round of RRR cuts is likely in 3Q amid an uneven recovery and slowing credit growth.”