China 10-Year Bonds Drop for Fifth Day as Yuan Damps Easing Bets

Updated on
  • Citic analyst says PBOC turning cautious on monetary easing
  • Offshore yuan at five-year low as fixing cut for seventh day

China’s 10-year sovereign bonds fell for a fifth day on speculation the yuan’s depreciation will prevent the central bank from easing monetary policy further.

The People’s Bank of China drained cash from the financial system in December via open-market operations and its Medium-term Lending Facility, even as demand for funds increased at the year-end. A central bank research bureau economist last week damped speculation lenders’ reserve requirements will be eased, saying that any adjustments should avoid causing too much volatility to short-term rates. The yuan in Hong Kong sank to a five-year low on Wednesday as the PBOC lowered its reference rate for a seventh day.

The yield on notes due October 2025 rose two basis points to 2.92 percent, the highest since Dec. 18, as of 4:49 p.m. in Shanghai, National Interbank Funding Center prices show. The bonds had the longest run of daily losses since they were listed in October. The benchmark 10-year yield fell to 2.8 percent, the lowest since 2009, on Dec. 28, ChinaBond data show.

“The PBOC looks to be relatively cautious,” Ming Ming, a Beijing-based bond analyst at Citic Securities Co., wrote in a research note on Wednesday. “Constrained by pressure on the currency, it’s difficult for the central bank to ease further in the short term. It’ll be difficult for bond yields to drop further.”

The central bank drained a net 20 billion yuan ($3.1 billion) in open-market operations and 30 billion yuan via the MLF last month, while 80 billion yuan of treasury deposits matured, which also pulled funds from the financial system, data compiled by Bloomberg show.

Reverse-Repo Offerings

The central bank increased the amount of reverse-repurchase agreements it offered to 130 billion yuan on Tuesday after the overnight money rate climbed to an eight-month high and equities slumped the previous day.

“The big reverse-repo offerings are meant to stabilize capital markets via short-term injections and reduce the chance of pumping in long-term funds,” Citic’s Ming wrote.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell two basis points to 2.33 percent, data compiled by Bloomberg show. The seven-day repo rate, a gauge of interbank funding availability, rose four basis points to 2.35 percent, according to a weighted average from the National Interbank Funding Center.

— With assistance by Helen Sun

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