China Rate Swaps Rise as Bonds Decline After PBOC Devalues Yuan

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China’s interest-rate swaps rose and bonds declined on speculation the yuan’s biggest devaluation in two decades will result in tighter cash supply onshore.

The People’s Bank of China weakened the yuan’s daily reference rate by a record 1.9 percent in a one-time adjustment, triggering the currency’s biggest one-day loss since the unification of official and market exchange rates in January 1994. The change ended a de facto peg that had been in place for more than four months and prompted concern capital outflows will pick up with the central bank’s support for the exchange rate.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, climbed seven basis points to 2.56 percent as of 4:30 p.m. in Shanghai, according to data compiled by Bloomberg. That’s the biggest increase since July 15. The yuan fell 1.8 percent to 6.3231 a dollar, having been previously been kept at about 6.20 since March.

“Expectations of a weaker currency led to a knee-jerk reaction on interest rates,” said Yan Yan, a Shanghai-based analyst at China Guangfa Bank Co. “However, it remains to be seen how the exchange rate will move going forward. We see some tentative bond buying after the initial reaction.”

Sovereign bonds declined, with the yield on notes due July 2025 rising six basis points to 3.54 percent, according to National Interbank Funding Center prices. That’s the biggest jump since they started trading last month. The yield on securities due July 2016 climbed 10 basis points to 2.3 percent.

Credit, Inflation

Aggregate financing, the broadest measure of credit, slumped to 718.8 billion yuan ($114 billion) in July, from 1.86 trillion originally reported for June, data from the central bank showed Tuesday. The figures came after a weekend report showed China’s consumer price index last month increased by the most this year.

“A combination of weak growth and higher headline CPI leads to expectations for more fiscal support but less aggressive monetary easing,” said Frances Cheung, Hong Kong-based head of rates strategy at Societe Generale SA. “Still, we believe PBOC will support liquidity in the money market if needed.”

The benchmark seven-day repo rate, a guage of interbank funding availability, fell one basis point to 2.40 percent, according to National Interbank Funding Center. The overnight rate rose two basis points to 1.57 percent.

— With assistance by Helen Sun

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