China Bonds Rally This Week as Stock Selloff Spurs Safety Demand

  • Ten-year yield fell to a record on PBOC cash injections
  • Shanghai Composite Index enters bear market on growth concern

Cash injections by China’s central bank spurred gains in bonds this week and pushed the 10-year yield to a record low as a selloff in stocks increased demand for the relative safety of government debt.

As yields dropped, the Shanghai Composite Index of shares entered a bear market this week on concern economic growth will slow further. The People’s Bank of China added 160 billion yuan ($24.3 billion) to the financial system via seven-day reverse-repurchase agreements in its open-market operations, up from 70 billion yuan a week earlier and driving benchmark money rates lower.

"The fall in risk sentiment and increased reverse repos have caused yields to fall rapidly," analysts led by Shanghai-based Chen Kang at SWS Research Co., a unit of brokerage Shenwan Hongyuan Group Co., wrote in a note. "As yields fall, any further declines will be increasingly restrained by factors like a rebound in short-term rates or stocks."

The yield on the 2025 notes fell eight basis points this week to 2.75 percent and reached an unprecedented 2.70 percent on Thursday, according to data from the National Interbank Funding Center and ChinaBond. The yield slipped one basis point on Friday. In the money market, the seven-day repo rate rose three basis points this week to 2.33 percent, a weighted average from National Interbank Funding shows. It closed at a seven-week low of 2.28 percent on Tuesday.

China’s economy, the world’s second largest, probably expanded 6.9 percent last year in the slowest annual pace since 1990 and will ease further to 6.5 percent in 2016, according to economists’ estimates in a Bloomberg survey. The Shanghai Composite dropped 9 percent this week and is down 21 percent from a high in December.

The nation is planning to increase bond issuance quotas for local governments this year to about 6 trillion yuan, compared with 3.8 trillion yuan in 2015, according to people familiar with the matter.

One-year interest-rate swaps, the fixed cost to exchange the floating seven-day repo rate, were little changed at 2.25 percent and are down eight basis points from the end of 2015, data compiled by Bloomberg show.

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