China Rate Swaps Have Best Monthly Gain This Year on Policy Bets

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China’s one-year interest-rate swaps posted this year’s biggest monthly gain on speculation the scope for monetary easing will be reduced as the nation turns to fiscal measures to boost the economy.

China will step up targeted macro policy control, pay high attention to downward economic pressure and maintain a proactive fiscal policy, the Xinhua News Agency reported Thursday, following a politburo meeting. China will expand its fiscal deficit in the second half, Vice Finance Minister Zhu Guangyao was reported as saying earlier in July. The People’s Bank of China has cut interest rates four times since November and relaxed lenders’ reserve-requirement ratios.

“We believe the meeting emphasized that fiscal policies need to play an active role,” said Qu Qing, a Beijing-based analyst at Huachuang Securities Co. “As borrowing costs in the real economy have been falling, it isn’t necessary to put too much emphasis on monetary easing, and the room isn’t big for further loosening.”

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, jumped 17 basis points this month to 2.54 percent as of 4:50 p.m. in Shanghai, data compiled by Bloomberg show. It rose two basis points Friday.

Asia’s largest economy has shown some signs of stabilizing, with industrial output accelerating and exports rising for the first time in four months in June. Gross domestic product is projected to expand 7 percent this year, the least since 1990, according to a Bloomberg survey.

New Supplies

China’s benchmark one-year treasury yield jumped 49 basis points this month, the most since June 2013, to 2.23 percent, ChinaBond data show. The 10-year yield fell 16 basis points to 3.44 percent. The gap between the two securities narrowed by 65 basis points in July, the most since April 2014.

Lenders including the Agricultural Development Bank of China will issue more than 1 trillion yuan ($161 billion) of new bonds over the coming years to fund infrastructure, Reuters reported Friday, citing people it didn’t identify. The yield on the sovereign notes due April 2025 climbed five basis points, the biggest increase since July 10, to 3.50 percent, according to National Interbank Funding Center prices.

The seven-day repo rate, a gauge of interbank funding availability, dropped 16 basis points in July to 2.44 percent, a weighted average from the National Interbank Funding Center shows. The overnight repo rate increased 32 basis points in the period, the most since February, to 1.46 percent.

— With assistance by Helen Sun

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