Chinese Rate Swaps Rise to Two-Week High as Loosening Bets Wane

Updated on
  • Hawkish Fed official comments limit room for further easing
  • Government bonds drop as Shibor rises to three-month high

China’s interest-rate swaps rose to a two-week high amid concern hawkish comments from Federal Reserve officials will limit the room for monetary easing in Asia’s largest economy. The onshore yuan declined to a two-month low.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, rose two basis points to 2.59 percent at 4:31 p.m. in Shanghai, data compiled by Bloomberg show. Two regional Fed bank presidents said at least two interest-rate increases may be warranted this year as reports showed the cost of living in the U.S. climbed in April by the most in three years and residential starts increased.

A potential U.S. rate rise may exacerbate Chinese capital outflows, while signs of faster inflation in China may also hamstrung efforts to boost the slowing economy through lower borrowing costs. The nation’s consumer-price index grew in April at the fastest pace since mid-2014, while the government increased fuel prices for a second time in a month last week.

“The CPI is under pressure to rise further, so it looks like there will be no more monetary easing in the foreseeable future,” said Ye Yuzhang, a Shanghai-based interest-rate trader at Industrial Bank Co. “As the market believes the bottom of interest rates is already seen, investors would use rate swaps to hedge interest-rate risks.”

Bonds, Shibor

The People’s Bank of China last lowered benchmark interest rates in October, and has kept the rate offered in open-market operations unchanged at 2.25 percent, signaling its intended level of short-term money rates.

The central bank auctioned 70 billion yuan ($10.7 billion) of seven-day reverse repos on Wednesday, bringing this week’s net withdrawal to 50 billion yuan so far. The PBOC offered 290 billion yuan of loans to 21 financial institutions on Monday via its Medium-term Lending Facility.

The yield on sovereign bonds due May 2026 rose three basis points to 2.97 percent, according to National Interbank Funding Center prices. That’s the highest level for a benchmark 10-year security since December, Chinabond data show. The three-month Shanghai Interbank Offered Rate added one basis point to 2.92 percent, the highest level since Feb. 23.

The currency traded in Shanghai fell 0.16 percent to 6.5367, the weakest level since March, according to China Foreign Exchange Trade System prices. The PBOC lowered the daily yuan reference rate against the dollar by 0.02 percent to 6.5216 a dollar. The offshore yuan declined 0.11 percent to 6.5547, according to data compiled by Bloomberg.

— With assistance by Helen Sun

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