China traders boost monetary easing bets as tariffs roil markets
With the trade war deepening, Beijing has vowed resolute measures and is considering frontloading stimulus in response to the Trump administration’s new tariffs
[HONG KONG] Traders are rapidly pricing in faster easing in China as trade tensions with the US escalated, pushing down a key gauge for such bets to drop the most in five years and inch closer to the lowest since 2008.
Five-year interest rate swaps (IRS) in China, a popular hedging tool sensitive to rate expectations, fell by the most since 2020 this week. That’s around six basis points away from touching the lowest level since 2008, according to data compiled by Bloomberg.
The rapid drop shows investors foresee Beijing likely speeding up long-awaited monetary easing to support the economy in a worse-than-expected trade spat with the US. It also exacerbates disruptions in the markets, backing the return of bond bulls and the weakening of the yuan since last week.
With the trade war deepening, Beijing vowed resolute measures and is considering frontloading stimulus in response to the Trump administration’s new tariffs on Chinese goods. That’s fuelling estimates for more monetary support from the People’s Bank of China, as state media signalled room for cuts in the amount of cash that banks must keep as reserves and a reduction in interest rates.
“The sharp drop in China’s five-year IRS suggests the markets believe the People’s Bank of China may act preemptively to cushion the potential economic fallout from US tariffs,” said Marco Sun, chief financial market analyst for the global markets division for China at MUFG Bank based in Shanghai. “This shift appears to be driven by rising concerns over the potential drag from the recently announced US tariffs, which are seen as an external shock to China’s economy.”
The Chinese central bank is expected to ease policy in a “measured” approach, and a cut in interest rates or the reserve requirement ratio could arrive in the coming weeks, he said.
China’s five-year IRS shed as much as 11 basis points to 1.42 per cent on Monday (Apr 7), the biggest drop since 2020. One-year IRS also dipped nine basis points to 1.52 per cent, down the most since 2022. BLOOMBERG
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