Interbank Market Tight Heading Into End of First Half

Rising yields in the interbank market reflect market mood amid a policy vacuum at the year end cash crunch arrives once more. The end of the IPO freeze has freed up capital, but it did not counteract the market's desire for higher yields yet and may take time to flow back into the market. Traders are also more cautious following the small uptick in the flash PMI for June.

Source: 央行宽松落空令银行间债市承压 月末资金偏紧

Long-term policy is also working to pull bond yields higher.

ZH: Confusion Reigns At PBoC As Multi-Trillion Yuan Bailout Threatens To Undermine Rate Cuts

This also serves to underscore what we said last month: because the central government is ultimately responsible for guaranteeing local government debt, and because yields on the new muni bonds are so close to those on treasurys, the newly issued local government bonds are really just treasury bonds, meaning that, in essence, the supply of Chinese government bonds is set to jump by CNY2 trillion in the coming months. If all of the local government debt ends up being refinanced, the end result will be the equivalent on CNY20 trillion in additional treasury supply.