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China Swap Drops to Eight-Month Low After PBOC Lowers Bill Rate

China’s one-year interest-rate swap dropped to an eight-month low after the central bank lowered its one-year bill yield for the first time since 2008, adding to evidence of a loosening monetary policy.

The People’s Bank of China sold the bills at a yield of 3.5733 percent, compared with a rate of 3.5840 percent at the previous 11 weekly auctions, according to a trader at a primary dealer required to bid at the sales. The rate on three-year bills was lowered to 3.96 percent from 3.97 percent at an October sale. The monetary authority pumped a net 96 billion yuan ($15 billion) of capital into the banking system last week as bill redemptions exceeded issuance.

“It is a policy-easing signal,” said Guo Caomin, a bond analyst at Industrial Bank Co. in Shanghai. “It’s in line with the government’s fine-tuning tone. But such a small yield drop may not be followed by a cut in benchmark interest rates.”

The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, declined seven basis points to 3.17 percent as of 5:02 p.m. in Shanghai, according to data compiled by Bloomberg. It earlier touched 3.15 percent, the lowest since March.

Premier Wen Jiabao said last month that the government will adjust policy as needed, fueling speculation two years of monetary tightening will be unwound as inflation moderates and economic growth slows. Consumer prices gained 5.5 percent from a year earlier in October, the least since May, according to the median estimate of economists surveyed by Bloomberg before data tomorrow. A 6.5 percent increase in July was the biggest since June 2008.

The seven-day repurchase rate, which measures interbank funding availability, dropped two basis points to 3.56 percent, according to a weighted average rate compiled by the National Interbank Funding Center.

The yield on the 3.94 percent government bond due January 2021 fell six basis points to 3.69 percent, the biggest drop since September, according to the Interbank Funding Center. A basis point is 0.01 percentage point.

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