IGM FX and Rates
27 Mar 2020
China Insight: Bond inflows pick up amid weak economy
The BOJ released it's JGB purchase plan for Jun yest afternoon.
As a backdrop, the BOJ has been reducing it's JGB purchases in the 1-5yr segment over Apr/May given the fall in yields in Mar, although the rebound in both the 2yr and 5yr yields in recent times has negated the need to cut purchases further for now.
Note too that the BOJ is loath to cut purchases in the mid sector given any such move would jolt the market and push the 10yr yield significantly higher, which then brings back the spectre of an unlimited bond purchase operation last seen in early Feb.
Looking ahead from here
The rebound in 2/5yr JGB yields have not been overly drastic.
Add in the fact that the BOJ may also need to factor in global risks.
As such, we see the possibility that the BOJ may well cut purchases in the front-end in Jul.
YCC machination facilitates tapering that's gone under the radar
We pointed out back in Sep 2016 when the BOJ shifted to a YCC strategy that because of how purchases would vary according to yield gyrations, there was a possibility of "tapering" if it needed to buy less (or sell) JGBs in order to counter a fall in yields outside of it's desired range.
This YCC machination and the BOJ's reduced JGB purchases over the past 2mths has actually been a form of quiet tapering.
The next BOJ meeting is on 15-16 Jun, and we don't expect any policy changes from them.
As we mentioned in our viewpoint posted on 25 May, the upside pressure in 10yr JGB yields has abated alongside UST yields (owing much to the Trump political turmoil), which negates the need to tweak the YCC targets (guiding s/t rates to -0.10%, targeting the 10yr yield around 0%) at this stage.
As mentioned then, our expectation of the window opening up for a change in BOJ policy has been pushed back from Sep to Dec, which would bring it more or less in line with the end of the ECB's QE program, and we expect the BOJ will keenly follow the market reaction to the ECB's move as a template.
IGM Credit, IGM FX and Rates
By Tim Cheung 23 Mar 2020
China's activity growth data for February were much weaker than expected, suggesting there is a very good chance the Q1 GDP y/y will fall into negative territory. Among forecasts from major investment banks, the most pessimistic ones for China's Q1 growth y/y are now in the -7/-9% range instead of +2/+3% territory seen a month ago, while that for the 2020 full-year growth are in the +1/+3% area rather than +4/+5%. To avoid the economy worsening further in the aftermath of the COVID-19 outbreak, Beijing inevitably has to ramp up fiscal spending substantially over the rest of the year. Given the postponement of the National People’s Congress (NPC) meeting which was initially scheduled for early March, we so far have no official data on how much the government will spend in 2020. However, with the onshore CNY IRS curve steepening sharply recently (chart 1), we doubt the potential increase in government expenditure will be small. Meanwhile, we reckon most (if not all) of the extra spending will be financed by the issuance of special bonds, in particular, the long-term ones. As per chart 2, special bond issuance increased substantially in Jan and Feb, which may be setting a trend for most of the year.
Topics Industry News