The financial landscape is currently experiencing a notable shift, particularly concerning interbank certificates of deposit (CDs). Recent upward trends in yields, coupled with the unusual occurrence of yield curve inversions between short-term and long-term CDs, signal a period of increased tension in the banking sectorMarket analysts have pinpointed several interrelated factors contributing to this phenomenon, notably the tightening of liquidity and a mismatch between supply and demand for interbank products.

The end of the Lunar New Year holiday has exacerbated challenges for banksOn the liability side, the decrease in interbank deposits combined with a significant rise in maturing interbank CDs has widened the gap in bank liabilitiesThe situation has compelled banks to seek out additional financing through the issuance of interbank CDs, further elevating yields and consequently exacerbating the pressure on banks' net interest margins—a crucial metric for profitability in the banking sector.

Data gathered from the China Bond Information Network indicates a notable increase in the yields on interbank CDs since February 10. During the period from February 10 to 21, yields on 3-month, 6-month, 9-month, and 1-year AAA-rated interbank CDs surged by 28, 27, 26, and 22 basis points respectively, reaching levels of 2.035%, 2.017%, 1.991%, and 1.955%. This rise reflects broader liquidity constraints and pressures on banks to manage their balance sheets effectively.

According to Zhang Jiqiang, the head of research at Huatai Securities, three primary factors dictate the pricing of interbank CDsThe first is the prevailing liquidity expectations—the linchpin of the market dynamicsSecond is the balance of supply and demand, where the pressure from liabilities influences the supply sideInterestingly, from the demand perspective, asset management products represent the largest group of investors in CDs, followed by money market funds and then local commercial banks

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Finally, there exists a price comparison effect between the comprehensive funding costs of banks and the yields on CDs, where changes in one will influence the other.

Insiders suggest that the rising yields are driven by both tight funding conditions and the imbalance between supply and demandHowever, there remains a long-term consensus that the market harbors expectations for looser liquidity in the futureThis anticipation may further compound the yield curve inversion observed between short and long-term interbank CDs.

Ming Ming, chief economist at Citic Securities, points out that the immediate cause of tight funding stems from declining bank lending capabilities, while a deeper issue relates to the retreat of the central bank's accommodative policiesIndeed, post-holiday, a significant contraction in the net lending volume of the banking system was observedResearch data from Huaxi Securities and Tianfeng Securities report that between February 17 and 21, the average daily net lending of the banking system fell to 11.8 trillion yuan, down from 14.4 trillion yuan in the preceding week and significantly lower compared to January's average net lending of 21 trillion yuan, marking a historical low point.

Moreover, the market for interbank CDs grapples with supply and demand imbalancesZhang Jiqiang notes that on the supply side, numerous banks significantly raised their issuance quotas for interbank CDs at the tail end of last year, hinting at robust issuance through 2025. Contrarily, even with current high yields on interbank CDs, non-bank financial institutions have not markedly increased their holdings, as the overall repo rates present more alluring investment alternatives.

Another critical aspect is the widening liability gap for banksAs interbank deposits continue to dwindle alongside a significant rise in maturing CDs, the strain on liabilities heightensConcurrently, the asset side of banks faces mounting pressure as demand for credit remains high, intertwined with accelerated issuance of government bonds compared to the same time last year, emphasizing banks' greater need to align their asset-liability management effectively.

New policies were introduced on December 1, 2024, which set non-bank interbank demand deposit rates to align with the seven-day reverse repo rate

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This adjustment substantially reduced opportunities for arbitrage across funding markets, prompting funds to shift from interbank deposits to other asset types, thereby negatively impacting deposit growth ratesA report from the central bank last December indicated that non-bank financial institution deposits fell by 3.17 trillion yuan in one month, with a subsequent decrease of 1.11 trillion yuan continuing into January.

According to a representative from a Beijing branch of a joint-stock bank, last year's stringent policy enforcement led to a more uniform pricing level for deposits, severely impacting the banking industry—his institution witnessed a reduction of over 20 billion yuan in deposits in 2024.

In terms of maturing CDs, banks face increasing pressureData from Huatai Securities indicates that the volume of maturing interbank CDs has spiked recently, expected to reach 1.12 trillion yuan this week, followed by maturing volumes of 597.7 billion yuan, 758.4 billion yuan, 738.0 billion yuan, and 667.7 billion yuan in the subsequent four weeks.

As banks manage these pressures, they continuously seek to stabilize net interest marginsThe increasing yields on interbank CDs signify a rise in funding costs, which further compresses net interest marginsIn the wake of the post-holiday season, several small and medium banks in provinces such as Shaanxi, Shanxi, and Hunan have raised deposit rates, primarily among rural commercial banks and village banksExperts believe that the interplay between interbank CD yields and deposit rates creates a dynamic where banks are motivated to raise deposit rates to attract lower-cost funds, as long as these new rates remain below the prevailing CD yields.

The pressing necessity for banks now is to mitigate their liability costs to stabilize their net interest marginsIn the short term, banks might alleviate the pressure on narrowed margins through improved liquidity conditionsAccording to Li Yishuang, a chief analyst at Cinda Securities, high credit issuance during the seasonal peak could sustain elevated credit volumes in the first quarter, compounded by increased government bond supply, but substantial relief for the liability pressures will likely hinge on broader liquidity improvements, as the tight funding scenario is not expected to be sustainable.

Looking ahead, the liability side remains crucial for maintaining stable interest margins

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As loan issuance rates decrease and existing mortgage rates are adjusted downward, banks are preparing to optimize their deposit structures through various strategic measures, along with performance assessments and focusing on salary distribution services to enhance overall financial stability as they navigate these challenging waters.