A different type of SHIBOR squeeze

There is a sense of deja vu in this story, with attention again shifting from the Fed to the PBC as SHIBOR rates move sharply higher and the PBC intervening with special operations.  This episode, however, looks quite a bit different to the squeeze that occurred mid-year.

This time around, it doesn't look like there is a huge amount of pressure in overnight markets, where rates have been, on average, lower in December than in November.

But there has been a sharp increase in 7 day interbank rates, which are up 160 bps in the last few days. This sharp increase is also noticeable across the remainder of the curve, with 1 year rates making their biggest move of the year.

This has pushed the spread between 1 day and 1 week rates to its widest since 2011, which is another period in which the PBC was tightening monetary policy. This is in sharp contrast to the mid-year squeeze, where 1 day rates were higher than 1 week.

The majority of interbank lending is done on an overnight basis, although the share of interbank lending on longer durations does tend to fluctuate.  It does look like lending at 1 week and beyond has increased its share of interbank lending as policy has tightened and this is similar reaction to the rise in interest rates in 2011. Part of this move may also be seasonal heading into the calendar year end and the approach of Chinese New Year.

It doesn't look like this is policy move for further tightening given overnight rates still look low.  If anything, the turbulence at longer durations is a by-product of this move, similar to 2011.

The implications of tightening for commodities is discussed in more detail in this post.  But one particular consideration is what this might mean for increased demand for copper financing in China. Previous periods of tighter credit markets have seen hoarding of metal to gain access to cheaper RMB financing.

In the past, spiky rates and an open arbitrage from LME to SHFE prices has seen large stockpiling of copper in China.  But at the moment, the arbitrage is not there and the copper curve is backwardated.  So its not immediately clear how these kinds financing deals would work, although the interest rate differential between short term USD (25 bps) and RMB (7%) is still huge and the USD/RMB relatively stable.