China Swap Rate Drops to Four-Month Low as Reverse-Repo Rate Cut

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China’s one-year interest-rate swaps fell to a four-month low after the central bank continued to guide borrowing costs lower.

The People’s Bank of China cut the yield it pays in reverse-repurchase operations on Tuesday, taking the total reduction since the Lunar New Year holidays to 40 basis points. The attempt to lower interbank rates comes before 30 initial public offerings of shares that will lock up 2.73 trillion yuan ($440 billion) next week, according to a Bloomberg survey.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, dropped three basis points to 3.15 percent as of 4:33 p.m. in Shanghai, according to data compiled by Bloomberg. The contracts touched 3.11 percent earlier, the lowest since Dec. 4.

“The PBOC will maintain a relatively loose monetary policy,” said Deng Haiqing, the Beijing-based chief fixed-income analyst at Citic Securities Co. “Institutions have already started to prepare funds for new shares starting from last week, hence the impact on funding rates next week should be smaller than expected.”

The PBOC sold 20 billion yuan of seven-day reverse repos Tuesday at 3.45 percent. That compared with 3.55 percent at the two auctions last week. The monetary authority injected a net 15 billion yuan in open-market operations in the two weeks through April 2, data compiled by Bloomberg show.

The seven-day repo rate, a gauge of interbank funding availability, declined 15 basis points, or 0.15 percentage point, to 3.09 percent, a weighted average compiled by the National Interbank Funding Center shows. It touched 3.08 percent earlier, the lowest since Nov. 20.

Bonds Drop

The Ministry of Finance sold 30 billion yuan of 10-year bonds at 3.64 percent Wednesday, according to a statement on the China Central Depository & Clearing Co. That was the highest yield since December and compared with the median estimate of 3.62 percent in a Bloomberg survey.

A forecast jump in municipal note sales is likely to push government bond yields up by as much as 20-60 basis points, and the 10-year yield may reach 3.85 percent to 4.25 percent in the second quarter, Chen Qi, head of fixed-income research at UBS Securities Co., wrote in a research note on Wednesday.

Sovereign securities fell. The yield on the debt due December 2024 rose nine basis point to 3.73 percent, the highest since Jan. 4, prices from the National Interbank Funding Center show.

— With assistance by Helen Sun

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