Financial institutions in China once again are boosting leverage to bet on everything from government bonds to corporate debt, according to Bloomberg.
The turnover of overnight purchase agreements has exceeded 4 trillion yuan during the past 18 day on a daily count, according to official data as reported by Bloomberg. The volume observed is usually associated with leverage buildup in the interbank market as the contracts are a popular way for financial firms to access short term funding for bond investments.
Beijing although usually intervene in such situations, however likely to maintain a blind eye this time around. The central bank aims to keep liquidity loose to revive the pandemic hit economy.
Kang Chen, fixed income analyst at Northeast Securities Co. said to Bloomberg, “As long as there’s room to make a profit from this carry trade, investors will feel motivated to add leverage”. He further noted, “This is a sure bet if traders want to amplify their profits. Traders now prefer to invest in policy bank notes, and also high-quality credit bonds sold by state-owned companies”.
According to Bloomberg, on Thursday a total of 4.3 trillion yuan of overnight repos were traded and the highest trading this year was 4.6 trillion yuan on November 18.