China Yield Curve Steepest in 13 Months as Muni Debt Saps Demand

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China’s 1.77 trillion yuan ($285 billion) of planned municipal bond sales this year is damping demand for longer-term sovereign notes, bringing about the steepest yield curve in more than a year.

The premium investors demand to hold 10-year government securities over one-year debt was 122 as of 4:30 p.m. in Shanghai, according to National Interbank Funding Center prices. That’s the widest gap since April 2014. The yield on the notes due April 2025 has risen 11 basis points to 3.46 percent this month, while that on the debt maturing April 2016 fell 47 basis points to 2.24 percent.

The People’s Bank of China has lowered interest rates three times since November in a bid to revive an economy expanding at the slowest pace since 2009, driving demand for short-term sovereign debt. Jiangsu province sold muni bonds last week, kicking off what will be a fourfold jump in 2015 issuance of the notes as Premier Li Keqiang encourages local governments to convert high-cost, short-term borrowings into longer-term debt and build a more transparent financing system.

“Yields on medium- to long-term bonds started to climb, as demand is being squeezed out by municipal notes,” said Xu Hanfei, a Shanghai-based bond analyst at Guotai Junan Securities Co. “As supply continues to increase, the steepened yield curve is likely to persist.”

Bottom Out

The yield on the sovereign securities due April 2025 rose two basis points on Monday, while that on debt maturing April 2016 declined 11 basis points, or 0.11 percentage point.

Jiangsu issued three-, five-, seven-, and 10-year notes at coupons two basis points higher than similar-maturity sovereign debt. It was followed later last week by Xinjiang autonomous region, which auctioned the same tenors at rates matching government notes.

China’s economy may bottom out in the second half, and the nation should maintain loose monetary and fiscal policies until that happens, China Securities Journal reported Monday, citing Fan Jianping, chief economist at the State Information Center.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose seven basis points to 2.37 percent, the highest in two weeks, data compiled by Bloomberg show. The contracts increased 10 basis points last week, the first advance since March.

The seven-day repo rate, a gauge of interbank funding availability, fell two basis points 1.93 percent, a weighted average from the National Interbank Funding Center shows.

— With assistance by Helen Sun

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