CNY Swaps: PBOC cuts rates; NDIRS bid after strong offers; 1s/10s seen flatter

• PBOC cuts 7d reverse repo and 1y MLF rates

• NDIRS bid after strong receiving

• 1s/10s NDIRS seen flatter

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PBOC cuts 7d reverse repo and 1y MLF rates

Players were caught off-guard on Monday when the PBOC unexpectedly cut rates on 7-day reverse repo and 1-year MLF by 10bps to 2% and 2.75% respectively to spur growth. The central bank also drained on the same day CNY200bn as it only issued CNY400bn of 1-year MLF against CNY600bn maturing securities this week.

The surprising cut happened on the same day when disappointing economic data for July was released. Industrial production was up 3.8% year-on-year, down from 3.9% in June and compared to economists’ forecast of 4.3%. Retail sales grew by 2.7% on an annual basis, whereas the market had predicted it to improve from 3.1% last month to 4.9%.

A player said recent data has suggested an alarming slowdown in the economy. The source said cutting rates came first as it would likely help the real estate crisis in China. However, it is not enough to revive growth, and a cut in the required-reserve ratio (RRR) may already be on the table.

NDIRS bid after strong receiving

CNY rates rallied hard soon after the cut. The CNY NDIRS curve made a big downward shift on that day with rates down 12-14bps across the curve. Receiving interest generally continued into Tuesday but ceased today as the move has become excessive, according to a trader.

5-year NDIRS, for example, has been paid up 2bps to 2.325% after lunch break, up from those traded below 2.3% near market close on Tuesday. 1-year NDIRS, on the other hand, has been paid up to 1.8725% before last seen changing hands at 1.86%. This compared to yesterday’s close of 1.86%. 2-year traded in several clips between 2.01% and 2.02%, up from previous close of 2%.

1s/5s and 2s/5s NDIRS therefore flattened out by 0.75-1bp to 45bps and 29.5bps respectively.

1s/10s NDIRS seen flatter

1s/10s NDIRS, an indicator for long-term economic growth, flattened out by a tad to 57.7bps, down from recent high of about 63.5bps last Monday.

Another market participant said, however, that the flattening may progress further.

“Front-end rate will go up given that the currency is on a weakening trend following the recent cut,” he explained.

CNY was fixed weaker at 6.7863 against the USD today. This compared to level at 6.7324 late last week, or approaching the highest over the past 12 months at 6.7898 in mid-May.

As such, he expects the effect of higher rates at the front-end and potentially further downside in long-dated rates would result in a rather drastic flattening in 1s/10s with 50bps as the near-term target.