At the end of the first quarter, the treasury reverse repurchase yield remained relatively low. Institutional analysis: ample liquidity has become the main factor.

The Daily Business Reporter | Wang Haimin The Daily Business Editor | Ye Feng

Recently, although it is the end of the first quarter, the yield on government bond reverse repos has been noticeably lower than in recent years. On the Shanghai exchange, the annualized yields of 1-day, 2-day, and 3-day government bond reverse repos have all been fluctuating only around 1.5%. On April 3, within the first half hour before the close, the annualized yields of the Shanghai exchange’s 1-day, 2-day, 3-day, and 4-day government bond reverse repos had continued to stay below 1%, and at the close they all fell below 1%. This has made some investors wonder: with such low yields, does it reflect that the market is currently in a heavy wait-and-see mood?

Regarding the recent phenomenon of low yields on government bond reverse repos, a macro chief from a certain brokerage told the reporter that this indicates that market liquidity is relatively loose right now. “But the decline in bond yields is limited, reflecting that market participants are still concerned about potential inflation and incremental policy measures. If the stock market enters TACO in the future, it may also bring disruptions.” He added further.

Zheng Lianghai, chief economist at FuanDa Fund, also pointed out that in March, regulations were implemented for interbank deposits. Under the interbank deposit self-discipline mechanism, the plan is to reduce interbank deposit interest rates, requiring that the quarterly-end proportion of interbank demand deposits with a rate higher than the 7-day reverse repo OMO policy rate (1.4%) be no more than 10%-20%. Meanwhile, there are market rumors that interbank CDs will be included in the centralized quota management of financial bonds. At the end of the month, liquidity remains loose. Against this backdrop, on one hand, bill rates are running low, and large banks’ willingness to lend funds remains high; on the other hand, interbank CD rates are falling in tandem.

In addition, the People’s Bank of China’s open market operations overall have been relatively restrained. In March, both the outright buy-in reverse repos and open market reverse repos were net liquidity drains, with only the MLF and treasury cash time deposits seeing a small net injection. On April 3, the PBoC forecast 3M outright buy-in reverse repos of 800 billion yuan, with 11000 billion yuan in that month, resulting in a net drain of 3000 billion yuan—more than the net drain of 2000 billion yuan in early March for 3M outright buy-in reverse repos by 1000 billion.

“With liquidity loose, and coupled with the impact of the Middle East affecting market risk appetite, institutions’ willingness to allocate to bonds has been strong. As a result, the main reason for the recent decline in reverse repo yields is still that liquidity is very loose. Judging from the DR trend, recently, the weighted average rate of DR001 has fallen by more than 3 bp to around 1.23%, hitting a stage low; DR007 has also fallen by more than 7 bp. In addition, the overnight quote from the anonymous quotation system (X-Repo) has dropped to 1.22% as well. All of these indicate that, at present, the supply of funds is abundant.” Zheng Lianghai added further. “April is a major month for tax payments. Going forward, watch the PBoC’s post-holiday operations and changes in liquidity during the tax period, as well as the issuance of government bonds and local government bonds.”

Cover image source: The Daily Media Materials Database

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