(Adds details, background)
SHANGHAI/SINGAPORE, April 7 (Reuters) - The volume of
repurchase agreements (repos) traded in China's interbank market
surged to a record high this week, as loosened liquidity
conditions at the start of the month prompted investors to build
up leverage to amplify profit.
Total turnover rose 637.7 billion yuan to 8.11 trillion
yuan ($1.18 trillion) on Thursday, data from the National
Interbank Funding Center showed, the highest on record.
High turnover is considered a gauge of leverage in the
bond market, as investors usually take advantage of ultra-low
short-term financing costs to fund investment in government
bonds.
Low bond market volatility this year has also forced some
investors to increase leverage to ensure profit.
The volume-weighted average rate of the benchmark
seven-day repo has fallen about 39 basis points
since March-end to 1.9972% as of Friday morning, not far from
the policy rate of the central bank's reverse repos for the same
tenor at 2.0%.
The weighted average of overnight repos plunged about 45 basis points during the same period.
Market rates fell and liquidity increased as cash conditions
eased after seasonal money demand at quarter-end ebbed and
official monetary easing measures came into effect.
"The central bank mother has sent a clear signal to the
market: as long as market funding costs are at the similar
levels as policy rates, she is fine," said a trading director at
a commercial bank, adding investors have perceived such a signal
and traded aggressively by adding leverage.
The central bank surprised the market last month by lowering
the amount of cash banks must hold in reserve for the first time
this year to keep liquidity ample and support a nascent economic
recovery.
However, market watchers pointed out that higher
leverage reflects investor optimism toward further easing
measures. But any sudden change to policy stance would likely
trigger significant volatility in the bond market, they said.
The People's Bank of China made its biggest weekly cash
withdrawal in three months, draining 1.132 trillion yuan on a
net basis for the week, the biggest since early January. "We see near-term downside for China rates at the front end
on the possibility of further easing, before a further rise in
Q2 on strong supply and credit growth," analysts at Standard
Chartered said in a client note.
($1 = 6.8772 Chinese yuan)
(Reporting by Winni Zhou and Tom Westbrook; Editing by
Muralikumar Anantharaman and Christopher Cushing)
Messaging: winni.zhou.thomsonreuters.com@reuters.net))
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