China Bond Decline Drives Yield to Two-Week High on Supply Bets

Updated on
  • Finance ministry debt auction plans indicate more issuance
  • Lack of more bank reserve-ratio cuts add to pressure: analyst

China’s 10-year sovereign bonds fell, driving yields to a two-week high, on speculation an impending increase in issuance will curb demand for existing securities.

The government will increase the frequency of debt auctions this year, according to a Ministry of Finance plan released Dec. 31, with Bloomberg calculations showing that the number of sales will rise to 68 from last year’s 51. The central bank refrained from offering reverse-repurchase agreements at Thursday’s open-market operation window, after drainingfunds from the financial system in December.

The yield on bonds due October 2025 climbed three basis points to 2.89 percent as of 4:30 p.m. in Shanghai, the highest since Dec. 21, according to National Interbank Funding Center prices. The overnight repurchase rate, a gauge of interbank funding availability, dropped nine basis points to 2.02 percent after surging to an eight-month high on Dec. 31, a weighted average from the National Interbank Funding Center shows.

“A higher frequency of debt sales indicates bigger supply pressure in 2016,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants Securities Co. “Meanwhile, a lack of reserve-requirement ratio cuts is adding to the cautious sentiment.”

A central bank economist last week damped speculation reserve requirements will be eased, saying that any adjustments should avoid causing too much volatility to short-term rates. The PBOC eased ratios for major lenders by 250 basis points in 2015 to 17.5 percent to help keep borrowing costs low amid an economic slowdown.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose for a fifth day, gaining one basis point to 2.34 percent, data compiled by Bloomberg show.

— With assistance by Helen Sun

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