One of the surprising responses to the PBOC’s ongoing tightening efforts has been banks’ increasing use of negotiable certificates of deposit (NCDs) as a replacement for repo market funding. Costs for the short-duration funding are rising, adding pressure on banks to issue even more NCDs. Higher interest rates are likely to pass through to the real economy, via formal lending rates, and bond yields and credit spreads could rise if banks struggle to roll over these funding instruments.
