China Bonds Decline for Third Week as PBOC Easing Odds Fade

  • Short-term goal is to slow leverage growth, central bank says
  • Official manufacturing PMI rose to highest since October 2014

China’s bonds dropped for a third week on signs the central bank is tightening funding conditions and as economic data point to a stabilizing economy.

The yield on sovereign bonds due 2026 rose five basis points from Aug. 26 to close at 2.78 percent, taking its three-week increase to 10 basis points, Chinabond data show. The yield dropped one basis point on Friday.

China’s official manufacturing gauge climbed to the highest level since October 2014 in August, according to data released Thursday, following an Aug. 27 report that showed faster industrial profit growth. The People’s Bank of China may not want to cut interest rates and reserve requirements for lenders unless the economy deteriorates significantly, according to Macquarie Securities Ltd.

"Both the Chinese central bank and the Federal Reserve have turned a bit more hawkish," said Cici Wang, a fixed-income analyst at Citic Securities Co. in Beijing. "With the data getting slightly better, the PBOC wants to tighten liquidity to prevent risks of a bubble in property and bond markets."

Leverage Issue

The PBOC offered 14-day reverse repurchase agreements last week for the first time since February, fueling speculation the authority wants to curb the use of cheaper, short-term borrowing to reduce leverage in the debt market. China’s short-term goal is to slow growth in leverage ratio, which was at 234 percent at end-2015, PBOC Deputy Governor Yi Gang said in a television interview shown Friday.

Expectations that the Fed will raise rates this year will add to the yuan’s depreciation pressure, limiting the room for PBOC easing, Qu Qing, an analyst at Huachuang Securities Co., wrote in a note this week.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell two basis points this week to 2.51 percent, data compiled by Bloomberg show. The benchmark seven-day repo rate dropped eight basis points to 2.30 percent, weighted average prices from the National Interbank Funding Center show.

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