Will CD Rates Rebound? Market Gaming and Interbank Deposit Self-Discipline Upgrade

What are the strategic factors behind the new low in AI deposit certificate rates?

Since the beginning of this year, banks have maintained ample liabilities, with interbank deposit certificate rates remaining at historically low levels. The 1-year AAA-rated deposit certificate rate has fallen below 1.55%. As expectations for self-regulation of interbank current deposit rates heat up, many institutions believe that due to funds seeking cash substitutes, demand for deposit certificates will continue to push rates downward, leaving room for further declines.

However, considering that current interest rates are already at low levels, market opinions on the future trend of deposit certificate rates remain divided. Some institutions warn that in the short term, the market may start speculating on reduced buy-and-hold reverse repurchase operations and liquidity fluctuations at quarter-end. Meanwhile, if credit growth recovers, the liquidity gap caused by deposit outflows could still pose some risks to deposit certificate supply.

Increased Volatility in Low-Level Deposit Certificate Rates

On March 16, the interbank deposit certificate market saw a notable uptick. As of the latest reports, the transaction rate for 1-year interbank deposit certificates issued by state-owned banks increased by over 1 basis point, but overall levels remain below 1.55%, with the lowest near 1.52%. In the primary market, issuance rates for 1-year deposit certificates by state-owned banks are also at historic lows, ranging between 1.52% and 1.54%.

Last Friday, the rates for interbank deposit certificates, which had been operating at low levels, further declined. Most 1-year AAA-rated interbank deposit certificates dropped below 1.55%, with decreases of over 1 basis point. On that day, the secondary trading rate for 1-year government and bank deposit certificates fell to around 1.53%, breaking the previous low of 1.54% and setting a new record.

There were reports last week that the market’s self-regulation mechanism for interest rate pricing intends to “patch” the management of interbank deposits, including constraints on the proportion of interbank current deposits exceeding the policy rate for 7-day reverse repos (currently 1.4%).

In fact, as room for lowering general deposit rates narrows and non-bank deposit growth has been rapid over the past year, banks are increasingly focusing on reducing the cost of liabilities through structural adjustments in interbank deposits.

Bank insiders and securities analysts told First Financial that, given the ongoing expectations for reserve requirement ratio (RRR) cuts and interest rate reductions within the year, and considering the low transparency and marketization of interbank deposit rate pricing, further regulation is both feasible and necessary.

So, how will an upgrade in self-regulation impact the deposit certificate market? Most industry experts agree that a decline in interbank deposit rates will affect both supply and demand sides. However, since banks currently are not short of liabilities and credit issuance is not overly active, the impact of the next adjustment on the deposit certificate market is expected to be limited, with overall positive effects outweighing negatives.

According to Qin Han, a fixed income analyst at Zheshang Securities, the upgrade in interbank current deposit self-regulation reduces the returns for non-bank institutions holding cash, objectively increasing market demand for cash substitutes such as deposit certificates, short-term bonds, and ABS.

“According to regulatory rules, the average remaining maturity of money market fund portfolios must not exceed 120 days, and systemically important money funds must not exceed 90 days. The same applies to bank current financial products,” Qin Han said in a report. He estimates that when large-scale current deposits with interest rates of 1.5%–1.6% are systematically lowered to 1.4%, the yield on cash holdings in asset management products declines, which, under relative pricing effects, boosts demand for interbank deposit certificates, short-term bonds, and the downward pressure on repo rates.

On the supply side, as per Left Deyong, a fixed income analyst at Industrial Securities, even if subsequent policies tighten interbank regulation, the scale of deposit outflows is unlikely to be as large as in previous rounds. Currently, banks are not under significant liquidity pressure, and with the central bank continuously injecting medium- and long-term funds, the demand for increased issuance of deposit certificates should be manageable. Some interbank deposits may shift toward deposit certificate investments, and short-term price pressures for 1-year deposit certificates are expected to be modest.

Looking back at 2024, under a series of regulatory measures such as banning manual interest payments, two reductions in deposit rates, and standardizing interbank deposit rates, some banks increased reliance on deposit certificates due to deposit outflows, with several raising their filing quotas at year-end. However, since June 2025, except for a surge in new issuance in October, most months have shown negative net financing for interbank deposit certificates, indicating that banks’ liquidity gaps are not under significant stress.

Yang Yewei, a fixed income analyst at Guosheng Securities, believes that if interbank deposit rates decline by about 10 basis points, and deposit certificates and short-term bonds follow suit, the 1-year deposit certificate rate for joint-stock banks could fall below 1.5%, and the 1-year AAA medium-term notes could drop to around 1.55%.

Where Is the Anchor for Interbank Deposit Certificate Rates?

However, Liang Weichao, a fixed income analyst at China Post Securities, views that the new lows in deposit certificate rates are not primarily caused by self-regulation affecting pricing but are more a result of trading strategies.

“From a practical perspective, the impact of the new regulations is not significant. The quarter-end assessment models, different self-regulation tiers, and the weighting methods do not cause large-scale shifts in demand between interbank current deposits and deposit certificates. The current pricing impact should be relatively limited,” Liang Weichao said. He notes that the rapid decline in deposit certificate rates is driven by long-standing expectations of tightening regulation. During this period, rates did not rise due to year-end or holiday effects but continued downward. Given that some cash products have short durations and supply has not yet recovered, the opportunity cost of holding cash or short-term assets has increased. After the new regulations, banks are likely to prioritize increasing deposit certificate holdings and accept the current low rate environment.

With liquidity tightening after the Spring Festival, some institutions suggest that deposit certificate rates may rebound. Additionally, recent economic data released by the National Bureau of Statistics shows that the economy in the first two months exceeded market expectations, raising concerns about increased credit growth and tighter bank liquidity.

Everbright Securities fixed income analyst Zhang Xu offers several insights. He notes that, from a valuation perspective, current deposit certificate rates are relatively expensive compared to policy rates. The spread between 6-month and 1-year AAA deposit certificates and the 7-day reverse repo rate are at their lowest in the past year, at 11 basis points and 13.3 basis points respectively, near the 5% and 3% quantiles since early 2024. “Even considering expectations of policy rate cuts, if the 7-day reverse repo rate drops to 1.3%, these spreads would only be at 34% and 28% of their levels since early 2024,” he said.

He also points out that the market may start short-term speculation on reduced buy-and-hold reverse repos and liquidity fluctuations at quarter-end. When rates have already declined significantly and market sentiment is optimistic, investors should exercise caution rather than chase higher prices, especially in a volatile market like this year.

So, where will the next anchor for interbank deposit certificate rates be? The main focus is on the R007 rate, which is the 7-day repo rate. Qin Han believes that the 1-year government and bank deposit certificate yield will depend on the actual decline of R007. “In normal times, the 1-year deposit certificate rate will not fall below R007. R007 sets the lower bound for the 1-year deposit certificate yield,” he said.

He further explains, “Historically, only during the first quarter of 2025 (when liquidity is tight and R007 rises sharply) and at month-end or quarter-end (when liquidity friction causes R007 to spike), does R007 exceed the 1-year deposit certificate yield. This means that the negative spread between the 1-year deposit certificate and R007 is mainly caused by unexpected rises in R007 during tight liquidity periods. When liquidity is ample, the 1-year deposit certificate rate generally does not fall below R007.”

Zhang Xu adds that the transmission chain of market-based interest rates in China runs from the central bank’s policy rate to market benchmark rates, and then to various financial market rates. Since deposit certificate rates are linked to money market benchmark rates, it is most appropriate to anchor them to the central bank’s policy rate, specifically the 7-day reverse repo rate. The marginal rates of buy-and-hold reverse repos and MLF can serve as supplementary references.

Liang Weichao also emphasizes that the key determinant of future deposit certificate rates will be issuance demand. The reduction in buy-and-hold repos needs attention. Regarding potential impacts of deposit rate adjustments on pricing, he suggests that the main effect could be a lower “top” for deposit certificate rates, with a narrower fluctuation range, likely between 1.55% and 1.6%. “While there is a possibility of rates falling below 1.55%, such scenarios would significantly compress the spread with policy rates and diminish the speculative value of investment,” he said.

Recently, the People’s Bank of China announced that to maintain ample liquidity in the banking system, it conducted a 500 billion yuan buy-and-hold reverse repo operation on the 16th, with fixed quantity, rate bidding, and multiple price levels, for a 6-month (182-day) term. Since this month’s maturing amount for similar operations is 600 billion yuan, this operation netted a withdrawal of 100 billion yuan. Previously, the PBOC had rolled over 200 billion yuan in 3-month buy-and-hold repos, so the total net withdrawal this month is 300 billion yuan, the first such since June 2025.

(Originally from First Financial)