China's 10-Year Bonds Gain Most This Month Since April on Easing

Updated on
  • Sovereign notes supported by fifth rate cut since November
  • Figures showing local-government debt in line with forecasts

China’s 10-year sovereign bonds rose this month, pushing the yield down by the most since April, as monetary easing offset concern that a surge in sales of municipal notes will damp demand.

The central bank cut benchmark interest rates for the fifth time since November from Aug. 26 and lowered lenders’ reserve-requirement ratios in an attempt to revive a slowing economy. Regional authorities had 15.4 trillion yuan ($2.4 trillion) of debt at the end of 2014, the official Xinhua News Agency reported Aug. 29. As the local administrations have to convert this into lower-yielding notes, the data suggests municipal issuance will remain above 3 trillion yuan annually over the next few years, according to Huachuang Securities Co.

“Last week’s double cuts confirmed the central bank’s intention to create a favorable liquidity environment,” Essence Securities Co. analysts led by Luo Yunfeng in Beijing wrote in a research note Monday. “There will be opportunities for sovereign and quasi-sovereign bonds in the long end. Local governments’ existing debt is largely in line with market expectations, and we’re not yet concerned about the future issuance of muni bonds.”

The yield on the sovereign notes due July 2025 fell 18 basis points this month to 3.33 percent as of 4:36 p.m. in Shanghai, according to data from the National Interbank Funding Center. The yield fell five basis points on Monday. That’s the biggest monthly drop for securities of that tenor since April, ChinaBond data show.

The Standing Committee of the National People’s Congress, China’s top lawmaking body, set a 16 trillion yuan ceiling on local-government debt for this year, according to Xinhua. Finance Minister Lou Jiwei said the quota for regional administrations to swap high-cost existing liabilities due this year will be 3.2 trillion yuan, compared with a previous limit of 2 trillion yuan, Xinhua reported on Aug. 27.

The People’s Bank of China conducted short-term liquidity operations with some banks on Monday, according to people familiar with the matter who didn’t want to be named because the operations weren’t made public.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, dropped 13 basis points this month and one basis point Monday to 2.41 percent, data compiled by Bloomberg show. That’s the biggest decline since April. The seven-day repo rate, a gauge of interbank liquidity, fell two basis points in August to 2.42 percent, data from the National Interbank Funding Center show. It rose four basis points Monday.

— With assistance by Helen Sun

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