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The authorities, MOF, PBOC and CBIRC, hosted a joint conference on Feb 7 to provide an update on supportive policies in light of the coronavirus situation. We believe the conference delivered a loosening bias tone as a nimble response to the virus outbreak. Next move following the huge liquidity injection and provision of first batch of special relending funds to more than a dozen of banks is going to be an LPR cut on 20 Feb.
We expect a 10bp cut in both 1-year and 5-year LPRs on 20 Feb (chart 1), similar to the magnitude of the latest OMO rate cut. A more sizable cut may mean the policymakers are opting for more aggressive monetary easing to cushion the economic shocks arising from the coronavirus outbreak.
Huge liquidity injection followed by a cut in LPRs will help bring funding costs lower. As a result, we will see a further downward shift of repo rates (chart 2).
Needless to say, CGBs and policy bank bonds are going to be major beneficiaries in this disaster-driven easing cycle. Despite that, we should not overlook the investment opportunities offered by credit bonds. Obviously, credit bonds have been lagging behind CGBs and policy bank bonds in terms of yield performance in this bull run. However, with policymakers introducing more measures to relieve the liquidity stress faced by enterprises, credit bonds will play catch up later this quarter or in the following one (chart 3).
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