In recent months, the demand for financial products, particularly interbank certificates of deposit (CDs), has experienced a noticeable decline. As of now, the one-year AAA-rated interbank CD yield has seen a rise of approximately 12 basis points since the Spring Festival, settling at around 1.872%. This marks a deepening inversion compared to the yield on ten-year government bonds. Furthermore, the one-month AAA interbank CD yield has jumped by about 34 basis points, reaching 2.04%. Over the past year, the yield on these one-year CDs has fluctuated significantly, starting the year at about 2.44% before gradually decreasing to a low of 1.74% by December 3rd. Interestingly, as we entered 2025, yields began to climb steadily. For instance, last week, the three-month CD yield increased by 18.81 basis points to 1.90%, while the six-month and one-year CD yields rose by 16.23 and 13.50 basis points respectively.
According to Zhou Guannan, Chief Analyst for Fixed Income at Huachuang Securities, the banking system is continuing to experience a tight funding environment, forcing the CD market to "increase prices to boost volumes." The pressure on liquidity is expected to amplify due to various factors, including the expiration of financial tools, tax payments, and other disruptions, with the total funding demand estimated to near 4 trillion Chinese yuan. This demand encompasses the maturity of 500 billion yuan in medium-term lending facility (MLF) operations, a large number of reverse repos, and significant government bond repayments.
Examining the ongoing inversion of short and long-term CD rates, Tang Yuanmao, a senior analyst at Guotai Junan, notes that the pricing of long-term CDs benefits from the logic of monetary easing, while short-term CDs are constrained by concerns over re-pricing at maturity. In the current climate of expensive short-term funds, non-banking institutions may be less inclined to engage in short-term CDs, opting instead to lend directly as a better alternative.
Recent data from Zhou Guannan indicates a weak demand for interbank CDs from financial institutions, including wealth management firms. In the previous week, net purchases were flipped to a net sale of 5.4 billion yuan in interbank CDs, with significant selloffs from both state-owned banks and city commercial banks. This shift implies a broader decrease in interest from these institutions in engaging with the interbank CD market.
Huang Zhihao from the fixed income division of Industrial Bank Research mentions that, despite favorable conditions in credit and institutional allocation in February, CD rates may be subdued in the latter part of the month due to a tightly managed liquidity environment under government policies aimed at stabilizing the currency and increasing bond issuance. Analyzing the interbank market, since January 2022, the average spread between interbank CDs and open market operation (OMO) rates has been around 38 basis points, though it currently sits at only 24 basis points, indicating potential for upward movement. Historically, February yields tend to increase by around 2% to as much as 6.5%, aligning with an expected yield range of 1.75% to 1.83% for CDs.
Despite this pessimistic outlook, several industry insiders are optimistic that the inversion of rates may "normalize" in the second quarter, with Tang Yuanmao asserting that the inversion is likely to correct itself. The anticipated easing of monetary policy will alleviate concerns surrounding maturity resets for short-term CDs, potentially allowing the yield spreads to realign with historical averages, thereby opening up significant downward potential for short-term yields.
As the month unfolds, liquidity has shown an overall trend of net withdrawal. Recently, the People's Bank of China (PBOC) conducted a 5.389 trillion yuan seven-day reverse repo operation at a 1.50% interest rate, with a backdrop of 5.58 trillion yuan in reverse repos maturing, culminating in a net withdrawal of 191 billion yuan.
Just a day prior, on February 18th, the PBOC announced another operation amounting to 4.892 trillion yuan in seven-day reverse repos, also at 1.50%. Given that reverse repos worth 330 billion yuan and 5 trillion yuan worth of MLFs were maturing on the same day, this resulted in a larger net withdrawal of 438 billion yuan. Market analysts were taken aback by the lack of continued MLF operations, with many initially expecting the PBOC to either renew or decrease the scale of such operations.
Despite a single day of net cash injection of 330 billion yuan due to no reverse repos maturing on February 11, all other days in February have seen the PBOC primarily engage in net withdrawal operations. From February 5th to 19th, which excludes the Spring Festival break, the cumulative net withdrawal reached nearly 1.7 trillion yuan. Analysts attribute this net withdrawal trend in PBOC's operations to a couple of reasons: firstly, a revealing shift from a "prudent" to a "moderately accommodative" monetary policy stance, wherein regulatory bodies are keen to guide financial resources effectively into the real economy; secondly, ongoing measures being implemented to prevent a drastic decline in long-term bond yields.
Nevertheless, as the week proceeds, the bulk of reverse repo expirations is drawing to a close, with upcoming expiration amounts down to 1.258 trillion yuan and 985 billion yuan for the last two trading days, indicating potential relief in the tight liquidity situation.
Economists like Ming Ming project that the PBOC will likely continue its "peaking and filling" approach in their open market operations, maintaining a comparable reticence in MLF behavior. Consequently, buyout reverse repos are anticipated to significantly bolster mid to long-term liquidity.
Tang Yuanmao further elaborates that although recent figures for new social financing and loans have been robust, bank liability pressures have not distinctly impacted credit supply. Given the scenario where financing remains strong against weak demand, the urgency for monetary easing in the short term remains low. Stabilizing the currency is paramount for maintaining both internal and external equilibrium, and reverses repos may yet take the approach of increasing both volume and lowering prices to adapt to government bond issuance pressures.
In conclusion, it appears that the window for realizing expansive monetary measures might still be some time away. Recent statements from the fourth quarter monetary policy implementation report reflect a cautious approach, emphasizing responsive adjustments of policy intensity and rhythm dependent on prevailing socio-economic conditions. The harmonization of rhetoric from previous monetary policy meetings captures the essence of the current approach, emphasizing nuanced and well-timed financial decision-making.