At the end of the first quarter, the treasury reverse repurchase yield remains relatively low. Institutional analysis: ample liquidity has become the core main reason.

Ask AI · Why does a loose liquidity environment push government bond repo yields to new lows?

Our reporter: Wang Haimin Our editor: Ye Feng

Recently, although it is the end of the first quarter, the yields on government bond repos have been noticeably lower than in recent years, with the annualized yields on Shanghai Stock Exchange 1-day, 2-day, and 3-day government bond repos hovering around 1.5%. On April 3rd, the annualized yields on Shanghai Stock Exchange 1-day, 2-day, 3-day, and 4-day government bond repos remained below 1% for most of the half-hour before market close, and all fell below 1% at the close. This has led some investors to wonder if such low yields reflect a heavy market wait-and-see sentiment.

Regarding the recent phenomenon of low government bond repo yields, a chief macro strategist at a securities firm told the reporter that this indicates the current market liquidity is relatively ample. “But the limited decline in bond yields reflects that market participants are still concerned about potential inflation, incremental policies, and other issues. The subsequent entry of the stock market into TACO (Trade-Adjusted Capital Outflows) may also cause disturbances,” he further added.

Zheng Lianghai, Chief Economist at Fubon Fund, pointed out that in March, regulations on interbank deposits were implemented, and the interbank deposit self-discipline mechanism aimed to reduce interbank deposit interest rates. It required that the proportion of high-yielding current deposits exceeding 7 days, which are above the 1.4% policy rate of 7-day reverse repos, should not exceed 10%-20% of the quarterly interbank deposit volume. Meanwhile, rumors that negotiable certificates of deposit (NCDs) would be included in the total financial bond quota kept the liquidity environment loose at month-end. Under this context, on one hand, bill rates remained low, and large banks’ willingness to lend remained high; on the other hand, NCD rates also declined in tandem.

Additionally, the central bank’s open market operations have been relatively restrained overall, with net withdrawals in both 3-month outright reverse repos and open market reverse repos, while only the Medium-term Lending Facility (MLF) and treasury cash deposits saw slight net injections. On April 3rd, the central bank announced a 3-month outright reverse repo of 800 billion yuan, totaling 1.1 trillion yuan for the month, resulting in a net withdrawal of 300 billion yuan—more than the 200 billion yuan net withdrawal in early March.

“Ample liquidity combined with Middle Eastern geopolitical influences has affected market risk appetite. Institutions are eager to allocate bonds, which is the main reason for the recent decline in repo yields—liquidity is very abundant. Looking at the DR (Deposit Rate) trend, recently, the weighted average interest rate of DR001 has fallen over 3 basis points to around 1.23%, hitting a new low for this phase; DR007 has fallen over 7 basis points; additionally, the anonymous click system (X-Repo) overnight quotes have also dropped to 1.22%. All these indicate that current liquidity supply is ample,” Zheng Lianghai further explained. He added that April is a month with heavy tax payments, so attention should be paid to the central bank’s post-holiday operations, changes in tax period liquidity, and the issuance of government and local bonds.