China’s One-Year Bonds Decline in Sign of Tightening Liquidity

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China’s one-year sovereign bonds fell for a second day amid speculation liquidity is tightening as the central bank buys yuan to support the exchange rate.

The People’s Bank of China will likely cut lenders’ reserve requirements this week or next to replenish funds in the financial system and help arrest an economic slowdown, according to Standard Chartered Plc. The currency has been kept at about 6.40 per dollar since Aug. 13, after a surprise devaluation led to a 3 percent drop over three days. Only the Hong Kong dollar, which is pegged, has been more stable over the past week among 31 major currencies.

The yield on notes due July 2016 rose three basis points to 2.35 percent as of 4:53 p.m. in Shanghai, according to National Interbank Funding Center prices. That for June 2018 debt increased two basis points to 2.90 percent.

“It’s clear that the central bank wants to stabilize the exchange rate by selling dollars and buying the yuan via big banks, and the result is naturally a drop of local currency supply,” said Huang Wentao, an analyst at China Securities Co. in Beijing. “This is why some investors are refraining from putting money into the bond market. Reserve-ratio cuts could lead to further depreciation pressure, and that’s why the PBOC would prefer to use reverse repos in the short-term.”

To hold down borrowing costs, the PBOC is adding funds via loans to banks. It conducted 240 billion yuan ($37.5 billion) of reverse-repuchase agreements last week and extended 110 billion yuan using its Medium-term Lending Facility.

The overnight repurchase rate, a gauge of funding availability in the banking system, increased for a record 38th day. It added two basis points to 1.85 percent, the highest level since April, according to a weighted average compiled by the National Interbank Funding Center. The seven-day repo rate fell one basis point to 2.54 percent, after rising to a six-week high of 2.58 percent on Aug. 20.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, climbed three basis points to 2.58 percent, data compiled by Bloomberg show.

— With assistance by Helen Sun

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