FxWirePro: Edge over CNY rates from bearish FI markets, a glimpse over repo-IRS and NDIRS

Concerns over ongoing and potentially intensified de-leveraging efforts in China keeps the onshore CNY bond market bearish. The PBoC rolled over MLF last week.

However, the further lengthening in the duration of the facility – with 74% in the 1Y tenor – and hence the higher weighted average funding cost, has caught the attention from the more sensitive investors.

Meanwhile, the already known MPA, and the latest revelation on regulators’ intention to further contain financial risk suggests that demand for bonds may fall.

CGBs underperformed repo-IRS in recent sessions, reversing the previous outperformance trend. Swap rates will soon be paid up further maintaining the spread with yields, amid hedging flows, especially at the 5Y, as longer-tenor IRS is not liquid.

Although front-end liquidity has not loosened yet, the tightening impact from capital outflows should be subsiding as the outflow pressure appears to be falling. With front-end rates better anchored, the repo-IRS and NDIRS curves should steepen across the 1s5s and 2s5s segments.

Q1 forex data show reduced outflow pressures compared with the previous quarter and the same quarter in 2016. Net FX sales by bank on behalf of clients dropped to USD32.7bn in Q1, versus 80.5bn in Q4 and 138bn in Q1 16. Cross-border net FX sales also fell to USD25.2bn, versus 51bn in Q4 and 112bn in Q1 16. The ratio of FX settlement to FX receipt is rising and the ratio of FX sales to FX payment is falling, pointing to less bearish sentiment towards the CNY.