China Bonds Drop Most Since December This Week on Debt Swap Plan
China’s 10-year government bonds headed for their biggest weekly decline since December on speculation a move to allow regional authorities to swap debt into municipal notes will increase supply.
The government will permit as much as 1 trillion yuan ($161 billion) of high-yielding debt to be converted into local-government securities that have lower yields, according to a statement dated March 8. Standard Chartered Plc estimates gross issuance of domestic sovereign notes will rise to 1.6 trillion yuan in 2015 from 400 billion yuan last year.
“When the news came out, there was a lot of confusion, we really didn’t know what the impact would be,” said Becky Liu, a Hong Kong-based rates strategist at Standard Chartered. Now, “people realize there would be a lot of new supply. This could create some indigestion in the domestic bond market,” she said.
The yield on the notes due September 2024 climbed 14 basis points, or 0.14 percentage point, from March 20 and four basis points Friday to 3.63 percent as of 12:31 p.m. in Shanghai, National Interbank Funding Center prices show. The weekly increase in the biggest since the period ended Dec. 5.
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, jumped 14 basis points this week and three basis points Friday to 3.55 percent, data compiled by Bloomberg show.
Money Rate
China’s benchmark money-market rate headed for a third week of declines after the People’s Bank of China added cash to the system via open-market operations for the first time in a month. The central bank, which drained 365 billion yuan over the previous four weeks following the Lunar New Year holidays, also cut the rate it pays on reverse-repurchase agreements for a third time this month on March 24 to 3.55 percent.
The seven-day repurchase rate, a gauge of interbank funding availability, dropped 31 basis points this week to 3.90 percent, according to a weighted average from the National Interbank Funding Center. It rose four basis points Friday.
The liquidity in the money market is “still not as loose” as the central bank wants, when compared to its 3.55 percent guidance, Standard Chartered’s Liu said.
Source: Bloomberg – China Bonds Drop Most Since December This Week on Debt Swap Plan
