China’s bond traders are dumping short-term debt on concerns that easing Covid-lockdowns may boost demand for cash and lead to a liquidity crunch.

The yield on one-year negotiable certificate of deposits sold by top-rated lenders rose the most since January 2021 on Monday while the yield on one-year China government bonds climbed above 2 per cent for the first time in more than three weeks. 

“The bond market is pricing in a rebound of growth and risk appetite as the removal of Covid curbs in Beijing and Shanghai seems faster than expected,” said Yang Hao, a fixed-income analyst at Nanjing Securities.

Traders are worried loose cash conditions, a key support for the bonds, may disappear just as it did in May 2020 when the overnight funding cost jumped 140 basis points in less than a month when China first bounced back from the pandemic outbreak, he said.

With China’s economic growth seen recovering from the worst of the lockdowns, improved risk appetite and expectations for record high government debt sales this month have stoked talk of the need for more liquidity injections from the central bank.

Short-tenor debt looks most vulnerable to a potential tightening of cash conditions driven by seasonal needs, surging bond supply and a recovery in credit demand, said Qi Sheng, an analyst at Orient Securities. The 10-year yield could rise to as high as 2.9 per cent this month if the People’s Bank of China refrains from injecting more cash via policy loans, he said.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The benchmark 10-year yield has risen about 10 basis points from a four-month low in late May to 2.81 per cent. The yield on one-year NCD from AAA-rated banks rose six basis points on Monday to 2.37 per cent. The overnight repo rate, a gauge of borrowing costs among banks, edged up to 1.4 per cent from around 1.3 per cent three weeks ago. 

Although the rise in the interbank rate seems limited for now, it’s enough to trigger concerns and there is a risk the rate could march higher toward the PBOC’s seven-day reverse repo rate of 2.1 per cent, Yang from Nanjing Securities said. BLOOMBERG