China’s central bank moves to deflate bond speculation

Central bank of China has made a subtle change to the way it supplies the financial system with cash, a move that market watchers see as an attempt to cool investments in assets such as bonds, which have ballooned on an influx of cheap, short-term money.

For the past two weeks, the People’s Bank of China has been decreasing the amount of the cheap seven-day loans — known as reverse repurchase agreements, or repos — that it makes to commercial banks in its daily money-market operations.

On Wednesday, it started supplementing those seven-day repos with pricier 14-day repos, a move that decreases the amount of cheap, short-term credit available in the financial system and guides demand toward longer-term borrowing.

Such short-term loans are typically used for the daily cash needs of financial institutions. However, in recent years, banks have increasingly channeled some of that money into investments and to investors, who borrowed it at cheap rates to plow into assets such as bonds. That has pushed up bond prices and depressed yields, which move in the opposite direction.

Source: MarketWatch