China MOF Sells Seven-Year Bonds at Lowest Yield in 10 Months

China’s finance ministry sold seven-year bonds at the lowest yield since August, after policy makers hinted at further easing measures to support the economy.

The Ministry of Finance auctioned 28.03 billion yuan ($4.5 billion) of the debt at a yield of 3.87 percent today, according to a statement on its website. That was the lowest level for similar-maturity notes since Aug. 7, and below the median forecast of 4 percent in a Bloomberg News survey. Seven-year yields dropped three basis points to 3.98 percent in the secondary market yesterday, the least since September, according to ChinaBond data.

The State Council will reduce borrowing costs and maintain reasonable growth in credit and social financing as China faces “relatively large” downward economic pressure, according to a May 30 statement issued after a regular meeting led by Premier Li Keqiang. The cabinet also decided to “appropriately” lower reserve-requirement ratios for banks that have extended a certain amount of loans to rural borrowers and small companies, following a cut for some rural lenders in April.

“Whether there will be a universal RRR cut is already meaningless to the bond market, as the market is already in the midst of a bull run,” said Liu Dongliang, a Shanghai-based analyst at China Merchants Bank Co. “Market optimism on the liquidity outlook is aiding the rally.”

The yield on the 4.42 percent government bonds due March 2024 was unchanged at 4.05 percent as of 4:40 p.m. in Shanghai, data from the National Interbank Funding Center shows. The rate on benchmark 10-year debt dropped to 4.02 percent yesterday, the lowest since Oct. 10, according to ChinaBond data. The yield fell 23 basis points in May, the biggest monthly decline since September 2011.

Reverse Repos

The seven-day repurchase rate, a gauge of interbank funding availability, dropped four basis points, or 0.04 percentage point, to 3.15 percent, according to a weighted average from the National Interbank Funding Center. That was a third daily decline.

The rate may average 3.5 percent this month, 331 basis points lower than the same period of 2013, as the central bank is expected to use reverse-repurchase agreements and relending to prevent any spikes, according to a Bloomberg News survey. Quarter-end cash demand and a crackdown on unregulated lending pushed the repo rate’s daily fixing to a record 10.77 percent on June 20 last year.

The cost of one-year interest-rate swaps, the fixed payment needed to receive the floating seven-day repo rate, rose five basis points to 3.43 percent, data compiled by Bloomberg show. It dropped as much as 14 basis points to 3.33 percent yesterday, the lowest level since June 3, 2013.

The People’s Bank of China asked lenders to submit orders for 14- and 28-day repurchase agreements, 14-day reverse repos, and 91-day bills as usual before money-market operations tomorrow, according to a trader at a primary dealer required to bid at the auctions.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Simon Harvey, Andrew Janes

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