China’s sovereign bonds rallied as a selloff in local shares prompted investors to seek the safety of sovereign debt.
The yield on government notes due May 2016 fell 10 basis points to 2.25 percent as of 5:04 p.m. in Shanghai, the most since May 27, according to prices from the National Interbank Funding Center. That on securities due April 2025 dropped two basis points to 3.47 percent, the lowest since July 9. The benchmark Shanghai Composite Index of stocks sank the most since February 2007.
“Falling equities are yet again benefiting the bond market,” said Frances Cheung, Hong Kong-based head of rates strategy at Societe Generale SA. “Front-end China government bond yields dropped on re-allocation of short-term money.”
The Shanghai Composite sank 8.5 percent Monday amid concern a three-week rally sparked by unprecedented government intervention is unsustainable. A measure of its 30-day volatility surged to the highest level since 1997.
In money markets, the overnight repurchase rate rose five basis points to 1.37 percent, the highest since May 8, a weighted average from the National Interbank Funding Center showed. The rate, which slid to a 2009-low in May, has increased for 18 straight days amid rising month-end demand for funds. It is approaching a 19-day winning streak seen in June that was the longest since 2006.
Commercial lenders need to park companies’ tax funds at the People’s Bank of China in the month after the quarter-end and this often drives short-term rates higher. The benchmark seven-day repo rate fell two basis points to 2.50 percent after rising last week to its highest level since July 6.
“Overall demand for funds is recovering,” said Guo Wei, an analyst at Bank of Nanjing Co. in Jiangsu province. “Interbank rates are normalizing from very low levels caused by the economic slowdown, but we expect the overnight rate to continue to trade below 1.5 percent in the short-term.”
The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, was steady at 2.54 percent, according to data compiled by Bloomberg.
— With assistance by Helen Sun