China Yield Curve Steepest Since 2010 as Bond Supply Set to Rise

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The yield premium investors demand to hold China’s 10-year sovereign bonds over one-year notes widened to the most since 2010 on signs a surge in municipal sales is crimping demand for longer-term securities.

Jiangsu province and Xinjiang autonomous region sold debt at yields close to the sovereign last week to kick off 1.77 trillion yuan ($285 billion) of such sales this year, a fourfold jump from 2014. Hubei, Guangxi and Shandong will auction 76 billion yuan of securities from Wednesday through Friday. A world-beating equities rally has contributed to the pressure, drawing funds away from bonds.

The yield premium for the notes due April 2025 over those maturing in April 2016 rose to 157 basis points on Wednesday, National Interbank Funding Center Prices show. That’s the most since November 2010, based on ChinaBond data. The yield on the April 2025 securities climbed one basis point to 3.53 percent as of 5:01 p.m. in Shanghai, while that on the 2016 paper fell 14 basis points, or 0.14 percentage point, to 1.96 percent.

“With more supplies coming up, it would be difficult for the long end to stabilize at the current level,” said Qu Qing, a Beijing-based analyst at Huachuang Securities Co. “In addition, the bullish sentiment on stocks will continue to pressure the bond market.”

The benchmark 10-year yield has risen 17 basis points this month, while that on the one-year notes fell 66 basis points, ChinaBond data show. The most-active contract for 10-year government bond futures on the China Financial Futures Exchange rose 0.2 percent to 95.8 Wednesday, after tumbling Tuesday.

Bond Auctions

The Ministry of Finance auctioned 30.12 billion yuan of five-year notes at 3.1 percent Wednesday, according to a statement on the China Central Depository & Clearing Co. That compared with the median estimate of 3.15 percent in a Bloomberg survey and 3.18 percent on the secondary market.

Hubei province sold 20 billion yuan of muni bonds on Wednesday. The coupons of the three-, five-, seven-year notes matched those of the sovereign, while that of the 10-year securities was one basis point higher.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, fell for the first time in three days, declining two basis points to 2.39 percent, data compiled by Bloomberg show. The seven-day repo rate, a gauge of interbank funding availability, declined two basis points to 1.91 percent, according to a weighted average from the National Interbank Funding Center.

Investors will place 4.9 trillion yuan of funds for 23 initial public offerings next week, according to the median estimate of six analysts surveyed by Bloomberg. Commercial banks are also parking companies’ tax funds at the central bank from April to early June.

— With assistance by Helen Sun

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