“Bonds will get a short-term boost next month as China may cut reserve ratios to offset the liquidity drainage,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp., adding this can’t be viewed as the start of a broad easing cycle. “The central bank just wants to tailor the solution to the liquidity problem. The long-term outlook for the debt market will still hinge on China’s economy and the trade negotiations.”

Cash supply tends to tighten ahead of the week-long holiday, which in 2020 falls at the end of January. Households and corporates typically withdraw money from banks to pay for gifts and travel. That alone will drain 1.5 trillion yuan from the financial system next month, Guotai Junan analysts led by Hua Changchun wrote in a note.

Another 1.3 trillion yuan will be drained due to factors such as banks buying newly issued local government bonds, according to China’s second-largest brokerage. More than 2 trillion yuan of those notes mature in 2020, and fresh debt to refinance the borrowing thus shoring up economic growth will probably start hitting the market soon. China in November ordered local governments to speed up the issuance of “special bonds” earmarked for infrastructure projects.

The central bank reduced the reserve requirement ratio by 1 percentage point before the holiday this year, and also injected more than 1 trillion yuan via open-market operations over a week. In 2018, a targeted RRR cut went into effect before the celebrations. The 10-year sovereign yield edged lower in the month before Lunar New Year in both years.

On Wednesday, the PBOC injected a net 200 billion yuan into the financial system via reverse repurchase agreements after skipping those operations for 20 sessions. It also lowered the rate on 14-day reverse repos to 2.65% from 2.7%.

Worst Isn’t Over for Chinese Bonds as Supply Surge Looms

Citigroup Inc. economist Liu Li-gang said the central bank will cut RRR to unleash cash because it “can immediately inject massive liquidity to the system.” Lu Ting, chief China economist at Nomura International Ltd., said Beijing is more likely to offer medium-term loans to banks instead — or the targeted version of that tool. Rising consumer prices, fueled by the surging cost of pork, are seen capping how much liquidity Beijing can provide without further stoking inflation.

The policy dilemma has cornered China’s government-bond investors, with the yield stuck in a 6-basis-point range over the past month. While the economy is growing at its slowest pace since the 1990s, November data was more encouraging. Throw in a phase-one trade deal agreed with the U.S. last week, and Beijing has even fewer reasons to go aggressive on stimulus measures.

It all means that after a brief spell in the sun in January, a rally in Chinese sovereign debt is unlikely to last. The return of risk appetite is already hurting the notes, with the 10-year yield rising to the highest level in a month on Tuesday. The rate was little changed at 3.23% as of 11:16 a.m. in Shanghai.

“In 2020, the bond market will be torn by transitory improvements in sentiment, triggered by the trade deal and economic data, and concerns on long-term growth and risks such as defaults,” said David Qu, an economist for Bloomberg Economics.