0
SHANGHAI, Dec 25: China’s yield flattened on Tuesday as most bill yields through one year rose in response to a high-than-expected yield at a central bank auction, but medium-and longer-term debt continued to range-trade.
The central bank auctioned 20 billion yuan ($2.7 billion) of one-year bills in its regular open market operation at 4.0583 per cent, up from 3.9933 per cent at the previous five weekly one-year bill sales.
The auction followed an interest rate hike last Friday, but many traders had thought bill yields might stay flat at auction because money market liquidity remained very loose due to seasonal factors.
“The higher-than-expected auction yield appears to be a concession by the central bank to major state banks, which naturally hope for higher investment gains after the interest rate hike,” said an open market trader at a Chinese commercial bank in Nanjing.
In response to the auction, the indicative one-year bill yield in the secondary market rose to 4.0750 per cent bid from Monday’s 4.0600 per cent, according to Reuters Reference Rates. Some traders think it could in the next few weeks regain its multi-year high of 4.11 per cent, hit in late November.
The 90-day central bank bill yield climbed to 3.5758 per cent bid from 3.5638 per cent, as the one-year sale result caused the market to expect a yield rise at Thursday’s auction of three-month bills.
The rise in most bill yields occurred despite extremely loose liquidity, thanks to seasonal finance ministry spending and the lack of big new equity IPOs in the pipeline.
The weighted average seven-day bond repurchase rate fell 5.87 bps to 2.0162 per cent on Tuesday, its lowest level since early October, even though the central bank drained an estimated 350 billion yuan on Tuesday through its previously announced reserve ratio hike, and a further 109 billion yuan via short-term repos.
CURVE FLATTENING: Traders and analysts said the curve flattening could continue for several more weeks.
Liquidity is expected to start tightening by the middle of next month with the approach of seasonal demand for Lunar New Year. The weighted average 21-day repo climbed to 2.8631 per cent on Tuesday from 2.7206 per cent on Monday, as banks started preparing funds for that period.
This could put a floor under bill yields. The seven-day repo is not expected to stay near 2.0 per cent for long, as many traders believe the central bank may want to establish a floor for it near 3.0 per cent as part of monetary tightening.
Meanwhile, bill yields above one year and bond yields may move sideways because of uncertainty about the inflation trend, at least until the market sees December inflation data in mid-January.
The indicative five-year government bond yield inched up to 4.2734 per cent bid on Tuesday from 4.2716 per cent on Monday, while the 15-year yield was unchanged at 4.6589 per cent.
“There are clear signs that the central bank is targeting short-term liquidity more than interest rates in its recent policy moves,” said analyst Dong Dezhi at Bank of China in Shanghai.
“So there is still some room for the yield curve to flatten in the next several weeks.”
Yields on longer-term financial bonds issued by policy banks rose on Tuesday in response to Monday’s debt offer by China Development Bank, which sold out 20 billion yuan of seven-year fixed rate bonds with a coupon set in advance at 5.14 per cent, well above the secondary market yield for such bonds.
The high coupon, apparently designed to ensure the bonds sold out in a market jittery about monetary tightening, caused the indicative secondary market yield of seven-year bonds issued by policy banks to jump to a multi-year high of 4.9600 per cent bid from Monday’s 4.9370 per cent. The 10-year yield also rose, by 1.6 bp.
However, yields on shorter-term policy bank bonds were marginally lower, suggesting the sale did not damage sentiment toward such bonds in general. —Reuters
