China Rate Swap Drops Most This Quarter Since 2008 as PBOC Eases

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China’s benchmark interest-rate swap dropped this quarter by the most in six years as the central bank stepped up monetary easing to combat an economic slowdown.

The People’s Bank of China implemented the most aggressive cuts in benchmark rates and lenders’ reserve requirements since 2008, while also injecting cash to banks using targeted lending facilities and money-market operations. In the past week alone, it resumed auctions of reverse-repurchase agreements, lowered its one-year lending and deposit rates and eased reserve requirements for some banks.

Policy makers are boosting the money supply and driving down borrowing costs as the economy expands at the slowest pace since 1990 and local governments press ahead with a 2 trillion yuan ($322 billion) debt swap. The latest measures come as the Shanghai Composite Index of shares fell 7.3 percent in June, trimming this year’s advance to 32 percent.

“They want to keep the money-market liquidity accommodative,” said Becky Liu, a rates strategist at Standard Chartered Plc in Hong Kong. “They still want to support the economy. They want to loosen credit conditions.”

The cost of one-year interest-rate swaps, the fixed payment to receive the repo rate, declined 116 basis points since the end of March to 2.38 percent in Shanghai, according to data compiled by Bloomberg. That’s the biggest drop since the final quarter of 2008. The rate fell nine basis points on Tuesday as the PBOC auctioned 50 billion yuan of seven-day reverse-repurchase agreements at a 2.5 percent yield.

‘Positive Surprise’

The seven-day repurchase rate, a gauge of liquidity in the banking system, dropped 122 basis points to 2.60 percent, a weighted average shows. It fell nine basis points on Tuesday.

“Today’s reverse repos are a positive surprise for the market,” Liu Dongliang, a Shanghai-based strategist at China Merchants Bank Co. “The central bank’s operation is likely to stabilize market sentiment after stocks plunged.”

The central bank offered 35 billion yuan of seven-day reverse repos on Thursday at 2.7 percent, auctioning the contracts for the first time in two months. It lowered benchmark interest rates by 25 basis points for the second month in a row on Saturday, as well as reducing some lenders’ reserve requirements. The proportion of deposits banks need to set aside as reserves was cut in April by 100 basis points, the most since 2008.

The yield on sovereign bonds due March 2017 fell 91 basis points this quarter to 2.54 percent in Shanghai, National Interbank Funding Center prices show. The 10-year yield declined five basis points to 3.60 percent, according to ChinaBond data.

For more, read this QuickTake: China’s Rate Risk

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