China Money Rates Jump as Cash Squeeze Spurs Record Bond Yield
China’s money-market rates jumped to four-month highs as corporate tax payments tied up funds amid uncertainty over the central bank’s policy stance. The one-year government bond yield climbed to a record as demand weakened at a sale of the securities.
The People’s Bank of China injected funds into the financial system using reverse-repurchase agreements yesterday, after suspending use of the contracts for two weeks. The 13 billion yuan ($2.1 billion) added compares with a net 102.5 billion yuan drained by the central bank in the last two weeks.
“The policy signal from yesterday’s reverse-repo operations I believe is to calm market sentiment, but the amount is very small, so this caused some confusion,” said Zhang Guoyu, an analyst at Orient Futures Co. in Shanghai. “That may be contributing to the increase in rates.”
The one-year interest-rate swap, the fixed payment needed to receive the floating seven-day repo, rose four basis points, or 0.04 percentage point, to 4.23 percent as of 5:13 p.m. in Shanghai. It touched 4.27 percent earlier, the highest level since June 24, and reached a record 5.06 percent in June as a cash crunch fanned concern some banks would struggle to meet debt payments.
The seven-day repurchase rate, a gauge of funding availability in the banking system, rose 55 basis points to 5.55 percent, according to a daily fixing by the National Interbank Funding Center. That was the 10th increase in a row, the longest run of gains since 2007. The overnight repo rate jumped 53 basis points to 5.21 percent.
The latest rise in interbank rates is likely to be partly because of fiscal deposits parked with the central bank, which tend to increase most in October owing to corporate sector tax payments, Goldman Sachs Group Inc. said in a report today. Money-market rates will retreat from this week’s highs once the corporate tax payments are completed, even if the central bank refrains from acting to ease the cash squeeze, economist Yu Song wrote in the report.
The seven-day repo rate opened four basis points lower today, and subsequently jumped 65 basis points to 5.69 percent, according to a volume-weighted average price.
“The surge in money rates and the very volatile intraday trading shows the market is totally confused about the PBOC’s intentions,” said Frances Cheung, a Hong Kong-based strategist at Credit Agricole CIB. Rates may remain choppy until the market gets further clues from the PBOC’s open-market operations tomorrow, she said.
The central bank asked lenders to submit orders for 14-day reverse repos, 28-day repurchase contracts and 91-day bills for tomorrow as usual, according to a trader at a primary dealer required to bid at the auctions. Reverse repos involve short-term asset purchases that add funds to the financial system.
The Ministry of Finance sold 28.25 billion yuan of one-year bonds today at 4.01 percent, and the bid-to-cover ratio was 1.2, according to two traders who participate in the auctions. That compared with a ratio of 1.4 at an auction of similar-maturity securities on July 3, according to data compiled by Bloomberg.
The yield on the government’s 3.48 percent bonds due July 2014 jumped 30 basis points to 4.10 percent today, according to data provided by the Interbank Funding Center. That’s the highest for a benchmark one-year sovereign debt since at least 2007. The yield on the government’s 4.08 percent bonds due August 2023 declined one basis point to 4.23 percent.
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