This week, the central bank significantly withdrew 354.8 billion yuan net, and cross-season liquidity remains relatively loose. Long-term bills are rising against the trend.

Ask AI · How does the upward move of long-end bills against the trend affect banks’ credit strategies?

China Finance Network (3月25日讯) (Editor Li Xiang) Recently, with the People’s Bank of China (PBOC) withdrawing liquidity, the bill market interest rates have diverged. Large banks’ collection of 1M bills around quarter/period-end has been relatively weak, and long-end bill yields have risen against the trend.

Over the first three working days of this week, the PBOC injected 104 billion yuan via a 7-day reverse repo, while the amount of 7-day reverse repo maturing was 208.8 billion yuan, resulting in a combined net withdrawal of 104.8 billion yuan. In addition, the PBOC carried out a 5,000 billion yuan MLF (Medium-Term Lending Facility) rollover today, with a net injection size of 500 billion yuan, which is smaller than the 300 billion yuan in the previous month. Meanwhile, because the buyout-style reverse repo for two tenors in March totaled a net withdrawal of 300 billion yuan, mid-term liquidity in March also saw a net withdrawal of 250 billion yuan. The total net withdrawal this week reached 354.8 billion yuan.

“However, currently market liquidity supply is still very abundant, and since March the DR007 rate has been centered around 1.44%, down 5BPs from February, which is the key reason the PBOC has reduced mid-term liquidity injections,” said the Financial Markets Department of CCB.

It is worth noting that, with a relatively loose funding environment feeding into the bill market, it can be seen that recently large banks’ efforts to raise bids for bill purchases have been limited; more of their behavior has been “offer while collecting,” especially for long-end products.

From the bill re-lending/transfer market, in recent days short-end products have seen a sharp catch-up decline, but 6M long-end products have rebounded against the trend, with market sentiment clearly diverging.

Based on the March 24 re-lending market quotes, in the early session large banks mainly bought short-term bills. The bill yields from April to August fell to varying degrees. In April, yields briefly dropped to 1.54%. In the afternoon, large banks collected 6M long-end bills on a rolling basis (“offer while collecting”), while non-bank financial institutions increased their collection efforts for 6M long-end bills only to a limited extent. By the close, 6M bills were at 1.12%, up 1bp that day. All other tenors’ yields fell, with 1M bills dropping sharply by 12bp to close at 1.53%.

China Finance Network notes that on today’s bill trading platform for re-lending, many quote providers are still seeking high-priced bills due in September. This applies across state-owned shares, large commercial banks, as well as liquidity-weaker city rural and foreign investors; however, some tenors’ buy-side demand has been weak. By the close, April-maturing state-owned bank acceptance bills rose 4BP to 1.45%, July-maturing state-owned bank acceptance bills rose 2BP to 1.29%, August-maturing state-owned bank acceptance bills edged up 1BP to 1.30%, and September-maturing state-owned bank acceptance bills remained at 1.13%.

A broker said that under current expectations of tighter liquidity, volatility in the short-end in the re-lending market has increased; faced with concentrated selling pressure, long-end products, due to a pickup in demand for allocation, have shown resilience. This trend is expected to continue through the end of the month.

It is worth noting that since March, the bill market has shown a supply-demand pattern of “short-end supply is surplus, while long-end supply is scarce,” further strengthening institutions’ preference for tenors. The aforementioned broker said that state-owned large banks generally do not have strong demand for short-term bills, which likely indicates that the overall credit-deposit/credit lending volume in the banking system for the month has met targets. Especially for high-yield corporate and retail loans, lending has been strong, so there is no need to rely on bill financing to meet credit scale targets. As a result, large banks lack the motivation to buy low-yield bills to “push” credit performance toward month-end credit assessment.

CICC Changchun Fixed Income analyst Song Qi also said that, based on February financial data, with no strong momentum in on-balance-sheet bill issuance, credit performance in February was still relatively strong and basically close to last year’s growth level. In addition, after short-end 1M bills mature, the credit scale would fall quickly, failing to meet the requirement for daily average growth pace. Meanwhile, 6M long-end bills can lock in the credit scale occupation for the next six months at once, stabilizing banks’ credit growth rates and continuously meeting the regulatory hard constraints on balanced issuance.

From the financial market data for January to February, enterprise medium- and long-term loan disbursement also appeared to be front-loaded. In January, bill financing fell sharply by 873.9 billion yuan. After entering March, corporate lending project reserves were quickly consumed. Especially, loan demand from small- and medium-sized city and rural commercial banks in regional areas has been weak; they urgently need long-end bills to continuously fill the credit gap, rather than using short-end bills for a temporary boost in lending.

“Bill Wind Notes” account manager Tang Zhipeng also said that, currently, the expected trajectory of bill yields at the end of March is likely to be similar to January. Credit disbursement expectations remain acceptable, bill supply growth is generally limited, and potential buy-side demand from trading desks around month-end is relatively high, which may still drive bill yields to remain volatile but trend downward.

(China Finance Network Li Xiang)