China Rate Swap Has Biggest Monthly Drop Since ’08 as PBOC Eases

Updated on

China’s interest-rate swaps completed the biggest monthly drop since 2008 as the central bank stepped up monetary easing in support of the economy.

The People’s Bank of China lowered lenders’ reserve requirements in April by the most since the global financial crisis, adding to a reduction in February and two interest-rate cuts since November. The monetary authority is considering expanding a lending program to bolster banks’ demand for local-government debt as issuance of the securities more than quadruples this year to in excess of 1.7 trillion yuan ($274 billion), according to people familiar with the matter.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, tumbled 101 basis points in April to 2.54 percent as of 4:20 p.m. in Shanghai, data compiled by Bloomberg show. The slide was close to a record 1.02 percentage point slump in November 2008 when the PBOC cut its one-year lending rate by the most in 11 years. China’s economy grew 7 percent in the first quarter, the slowest expansion since the period ended March 2009, official figures show.

“Growth in the second quarter is likely to slow down further, so there will be more easing coming,” said Dong Dezhi, a Shanghai-based analyst at Guosen Securities Co. “Policy makers’ top priority will shift to ensuring growth.”

The yield on sovereign bonds due December 2024 slid 25 basis points this month to 3.42 percent, National Interbank Funding Center prices show. It fell one basis point on Thursday.

Liquidity Injection

The PBOC injected about 1.2 trillion yuan into the financial system when it cut lenders’ reserve-requirement ratios by 1 percentage point on April 20, Australia & New Zealand Banking Group Ltd. estimated. It is discussing adopting unconventional policies including making direct purchases of local government bonds from the market, Market News International reported Monday, citing unidentified people.

The seven-day repo rate, a gauge of funding availability in the interbank market, tumbled 145 basis points in April to 2.38 percent, a weighted average from the National Interbank Funding Center shows. That’s the biggest monthly drop since February 2014.

The central bank refrained on Thursday from conducting open-market operations for the fourth auction window in a row.

— With assistance by Helen Sun

Before it's here, it's on the Bloomberg Terminal. LEARN MORE