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China Market Updates (11 May 2015 - 15 May 2015)

Published time:[18 May, 2015 19:52] From:E Fund Management (HK) Co., Limited

Weekly China Market Updates (11 May 2015 – 15 May 2015)

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Market Review

PBoC’s interest rate cut and weaker than expectation macro data pushed bond market to a new height last week. The market hiked through the week with no correction. Over the week, Chinabond Composite Total Return Index was up by 1.11 points, or 0.67%, from 164.86 to 165.97. However, 10 yr treasury yield (CUTB10) gained 2.1 bps from 3.370% to 3.391%, which means yield curve steepened further. 

Source: Bloomberg 15 May 2015
 

Bond market didn’t react much to the interest rate cut on last Monday, which was what we expected. With more and more stimulus monetary policies coming out, market still has the concern that fundamental may pick up in Q2. Thus long term yield was stable or even increased after the cut. But as liquidity getting looser, cash rate tumbled with 7 day repo rate dropped from 2.21% to 1.90%, short term bond yields slipped dramatically. 
 

Source: Bloomberg 15 May 2015

At the same time, fundamentals were still supportive to the market as newly released data mostly showing a weaker economy than market forecast. CPI stood at 1.5%, which, after seasonal adjustment, was weaker than the former month. PPI grew at -4.6% YoY, showing that inflation still has a long way to bottom up. Both Industrial Production and Fixed Asset Investment YTD YoY recorded 6.2% and 12.0% growth, each lower than market forecast at 6.3% and 13.5% separately. Retail Sales YoY was also dipping further from 10.2% the month before to 10.0% this month. M2 was growing at 10.1%, the lowest level in the past 10 years, showing funding demands of private sectors were weak. 

 

Source: Bloomberg 15 May 2015

Source: Bloomberg 15 May 2015

Yield curve steepened further and dramatically as we expected. 10 year treasury yield grew by 2.1 bps over the week, while short and mid-term yields (below 3 years) dropped by more than 30 bps. As liquidity keeps loosening, we believe yield curve will steepen further in the coming months. 
 

Source: Bloomberg 15 May 2015

Source: Bloomberg 15 May 2015

Credit spread dropped as we expected last week. Right now as liquidity is very stable and cash rate heading for lower and lower position, carry trade spread still very high, investors will keep buying credit bond to do carry trade. With less credit events as financial season passed and monetary policy loosening further, credit spread might keep narrowing in the coming months. Over last week, the spread of 5Y AA over 5Y policy bank bond declined from 178.57 bps to 170.06 bps.
Source: Bloomberg 15 May 2015

Market Outlook


 

The newly release fundamental data were still supportive to bond market. But investors are more and more cautious with yield stepping down to new low level. We can clearly see that investors are reluctant to bring long term yield down. Short termly, bond market may experience some correction, but short term yield will drop further and yield curve will keep steepening. At the same time, credit spread will narrow down further, especially for short term credit bonds. 

Key market changes


 

Source: Bloomberg 15 May 2015

Source: Bloomberg 15 May 2015

Source: Bloomberg 15 May 2015

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This document has not been reviewed by the SFC of Hong Kong. Issued by E Fund Management (Hong Kong) Co., Limited.
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