China 10-Year Bonds Rally on Report PBOC Cut Loan Rates to Banks

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China’s 10-year sovereign bonds rose by the most in more than three weeks on speculation banks will have more cash to invest in debt after the monetary authority reduced the interest rate on loans to commercial lenders.

The People’s Bank of China recently provided funds through the Pledged Supplementary Lending program, which allows banks to use collateral to borrow money at 3.1 percent, Reuters reported Monday, citing people it didn’t identify. That compares with 4.5 percent last year, according to a National Business Daily report, which also quoted a trader as saying that China Development Bank was offered at least 1 trillion yuan ($161 billion) at the new rate.

“The use of the PSL indicates the central bank will maintain a fundamentally loose monetary policy,” Li Yamin, a Shanghai-based analyst at Ping An Securities Co., wrote in a research note Tuesday. “It’s obviously trying to guide long-end interest rates lower.”

The 10-year note yield fell eight basis points to 3.61 percent in Shanghai, National Interbank Funding Center Prices show. That’s the biggest drop since May 8. The yield climbed to 3.68 percent Monday, the highest since the securities were sold in April.

There’s plenty of room to further cut reserve-requirement ratios for banks, Sheng Songcheng, head of the statistics department at the PBOC, said at a forum, according to a transcript published by 21st Century Business Herald. The amount of cash that lenders must park with the central bank was lowered by one percentage point to 18.5 percent effective April 20, the second reduction this year.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, dropped three basis points Tuesday to 2.36 percent, data compiled by Bloomberg show. It fell to a one-week low of 2.35 percent earlier.

Repo Rates

The seven-day repo rate, a gauge of interbank funding availability, gained nine basis points to 2.02 percent, a weighted average from the National Interbank Funding Center shows. That’s the biggest increase in more than three months. Twenty-three companies’ initial public offerings will lock up 4.9 trillion yuan of funds Tuesday through Wednesday, according to the median estimate of six analysts surveyed by Bloomberg.

The PBOC sold repo agreements to targeted financial institutions recently to drain funds, according to two people familiar with the matter last week. The central bank didn’t conduct open-market operations on Tuesday, extending a six-week halt.

— With assistance by Helen Sun

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