Let’s cut through the noise, folks. Citics Securities just dropped a research report revealing something crucial: the market’s reaction to rising money rates is way more sensitive than its reaction to falling ones. Seriously, that ‘scar tissue’ from earlier this year’s tight liquidity is still haunting the bond market.
But hold on. Don’t let that send shivers down your spine. While the initial knee-jerk reaction might be to brace for higher rates, Citics lays out a compelling argument for a downward correction in the DR001.
Think about the bigger picture. Beijing’s priorities—stable growth, credit easing, and boosting domestic demand—typically require short-term funding rates to stay slightly below policy rates. That’s where we should be heading.
Their base case? A return to 1.4% with some normal fluctuations. An optimistic scenario points towards movement within a 30 basis point range of OMO operations. This isn’t about rates surging; it’s about when they’ll come back down.
Let’s dive a little deeper into what’s happening with the DR001 rate. It’s a key indicator of short-term liquidity in the Chinese money market.
Historically, DR001, or the 7-day repurchase rate, moves in tandem with policy signals. When the central bank wants to tighten liquidity, DR001 rises.
The recent overreaction to even minor tightening signals shows a deep-seated fear in the market. This is largely attributed to the memory of the early 2024 liquidity squeeze.
However, a functional, growing economy needs reasonable borrowing costs, and the government knows that. Downward correction isn’t just possible; it’s probable in the medium term. Keep your eyes peeled for OMO operations – those are the key signals to watch for now.
