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CNY Rates - Liquidity is tightening in the run-up to lunar new year, with 7D repo fixing rate climbing to 2.30%. In anticipation of increased cash demand needs, PBOC net injected CNY71bn of liquidity via RMB65bn of 7D reverse repo and CNY22bn of 14D reverse repo (maturing operations amounted to CNY16bn). More injections would be expected within this and next week. Beyond lunar new year, we would expect 7D repo fixings to return below OMO rate with policymakers maintaining accommodative liquidity conditions to support credit growth. Equity inflows, via Northbound Stock Connect, continue to be strong with net purchases of CNY7.6bn yesterday. We are near-term bullish (in 1Q) on CGB on the back of these equity inflows, with increased conversion flows of export proceeds/fx deposits (to pay bonuses before LNY) also a potential short-term support. On swaps, we think the current key drivers (prospects of rate cuts, cyclical recovery, prospects of larger central/local government issuances) clearly argue for steepening of 1Y vs 5Y IRS. However, we are wary about the risk-reward as the curve is already quite steep (1Y vs 5Y IRS spread at +58bps).
KRW Rates - We expect BOK to hike 25bps at tomorrow's meeting, with possible hints that the hike cycle is nearing completion. Considering the still-wide spread between 3M CD and policy rate, passthrough from rate hikes to 3M CD is likely to remain lower than usual. We expect 0-5bps passthrough to 3M CD after tomorrow's hike. We have held a receive swaps bias for the best part of 4Q, as we felt that markets would increasingly price for BOK to turn its focus towards growth and financial stability in 2023. Swaps rates have indeed come down a lot. At current levels, we feel that risk-reward no longer justify a receive bias, especially for the very front-end of the curve. The 3M CD fixing is currently at 3.88% and we are forecasting BOK to hike 50bps in 1Q before staying on hold at 3.75% through year-end. Assuming a conservative 25bps spread between 3M CD and policy rate, 3M CD fixing would be above 4.00% post hikes. Therefore, 1Y IRS at current 3.70% appears to be too low relative to current and projected future 3M CD fixings. 1Y IRS is a pay, in our view.
IDR Rates - 10Y IndoGB yields have fallen almost 30bps over the past week to 6.80%, largely on lower 10Y UST yields. At current 6.80% level, we think there will be greater resistance for yields to fall further and the risks are skewed towards small-to-moderate rises (to 6.85-7.00% range) in the near term. Besides compressed IndoGB-UST yield differentials, frontloaded SBN supply in 1Q would be a constraint on a further rally in 10Y IndoGB (target 1Q issuances has been set at IDR245tn). The lower US rates and lower USD environment is also likely to be seen as conducive for issuances and thus, there would be an attempt to complete as much issuances as possible, even if it means some concession via higher yields. We expect 6.80-7.00% range to hold in 1Q.
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