- The yield in China's interbank bond market initially fell and then rose on Wednesday. This was due to the People's Bank of China (PBOC) continuing to withdraw medium- and long-term liquidity, coupled with redemption pressures faced by wealth management and funds, leading to cautious market sentiment ahead of the 10-year government bond auction.
- The National Bureau of Statistics (NBS) released May's price data showing divergence. The Producer Price Index (PPI) rose by 3.9% year-on-year, reaching a nearly four-year high, while the Consumer Price Index (CPI) increased by 1.2% year-on-year, remaining flat from the previous value. This indicates characteristics of imported inflation and blocked transmission between upstream and downstream.
- The central bank conducted a 7-day reverse repo operation of 159 billion yuan today, achieving a net injection for the fourth consecutive day, although the scale of medium- and long-term outright reverse repo operations has been continuously reduced previously.
Redemption Pressure and Auction Caution Trigger Yield Rebound
After several days of adjustments, China's interbank bond market fell during Wednesday's morning session due to a slight easing of funding conditions and weakness in the equity market, but rose slightly again by midday. Market participants noted that the effects of the PBOC's continued withdrawal of medium- and long-term liquidity are becoming apparent, and the previous optimism in the bond market has gradually faded. Especially after the fund market faced significant net redemption pressure yesterday, risk aversion among wealth management subsidiaries and securities firms has increased. An investment manager at a South China securities firm revealed that bank wealth management subsidiaries experienced fund redemptions, causing a plunge in government bond futures during the session. Additionally, the 10-year government bond auction conducted this morning prompted a defensive reaction in the secondary market before the results were announced, with market expectations for the auction's positioning and demand leaning towards caution.
Price Data Divergence Continues Upstream Cost Transmission Blockage
The NBS released May's price data today, showing a 3.9% year-on-year increase in PPI, the highest level in nearly four years, while CPI rose by 1.2% year-on-year, unchanged from the previous month. This data largely met market expectations and had a relatively limited direct impact on the bond market. However, analysts pointed out that the divergence between high PPI and low CPI deeply reflects the current economic pressure from imported inflation. Enterprises continue to face cost pressures, while the transmission of upstream costs to the retail and consumer ends is not smooth. If core inflation rebounds due to cost transmission in the future, the market's pricing of monetary policy may face reassessment, and bond market yields may face further upward pressure.
Central Bank's Short-term Reverse Repo Expansion and Medium- to Long-term Liquidity Withdrawal
The People's Bank of China conducted a 7-day reverse repo operation of 159 billion yuan in the open market today, with the bid rate remaining unchanged at 1.40%, fully meeting the needs of primary dealers. As today's maturity amount was equivalent, the open market achieved an equivalent net injection for a single day, marking the fourth consecutive day of net injection by the central bank, indicating an intention to maintain short-term funding balance. However, in terms of medium- to long-term liquidity, the central bank's 500 billion yuan 3-month outright reverse repo operation conducted last Friday was 300 billion yuan less than the maturity amount that day, marking the seventh consecutive time this tool has been reduced since early March. A total of 1.4 trillion yuan of outright reverse repos will mature in June, along with 600 billion yuan of medium-term lending facility tools, posing a major concern for the bond market regarding the phased reduction of medium- to long-term liquidity.
Narrow Fluctuations in Spot Bond Yields and Future Policy Outlook
In terms of secondary market performance, the latest transaction price of the 30-year special government bond 2600002 in the interbank market corresponds to a yield of 2.225%, slightly up by 0.05 basis points (bps) from the previous day's close; the latest transaction price of the 10-year active government bond 260010 corresponds to a yield of 1.7365%, slightly up by 0.15 basis points from the previous day's close. Although the market is temporarily disturbed by redemption waves and supply pressures, some traders believe that as funding conditions gradually return to normal balance from the previous ultra-loose state, the central bank's attitude towards liquidity control may become more moderate in the future, and the cautious sentiment in the bond market is expected to ease accordingly. If the momentum of macroeconomic recovery remains stable and inflation does not spread comprehensively, long-term yields may maintain a narrow fluctuation pattern in the short term.
