Global Rates Ideas: EM & DM

Research evidence excerpt

Global Rates Ideas: EM & DM

Fixed Income ● Rates

3 July 2026

◆ Why is the PBoC introducing the overnight reverse repo in open market operations

when it already has the temporary overnight reverse repo facility?

Open market operations take place from 9:00-9:20am, while the temporary repo and reverse

repo facilities are designed to be activated at 3:00-3:30pm. Given the timing difference, we view

the OMO as proactive liquidity signalling, while the temporary facilities serve as a backstop

liquidity measure. By extension, the addition of the overnight tenor in OMO is an indication of

the policy intention to proactively reduce overnight funding rate volatility.

◆ Could the overnight reverse repo become a permanent feature in open market

operations?

Possibly. Just like the 7-day reverse repo, the overnight reverse repo in OMO is designed

with a fixed rate feature. Comparatively, the 14-day reverse repo, which is done on an ad

hoc basis, is designed as a fixed quantity operation. The fixed rate feature suggests to us

that there is an intention for the tool to play a bigger role in monetary policy.

We cannot rule out the possibility that the central bank may be testing the grounds for a

shift towards an overnight rate policy regime. It is noteworthy that there were more

mentions of the overnight rate in the central bank’s Q1 2026 monetary policy report,

including a special section on the overnight rate regimes in other developed nations.

Conducting more liquidity intervention on the overnight tenor would actually better mimic the

current state of China’s money market, where transactions are skewed to the overnight

tenor (Figure 8).

◆ China rates volatility is already low. Why does the PBoC still need to reduce volatility?