China Swaps Rise for First Time in Two Weeks After Funds Drained

China’s one-year interest-rate swaps rose for the first time in almost two weeks on speculation the central bank’s draining of funds from the financial system yesterday signaled it won’t loosen monetary policy.

The People’s Bank of China conducted 30 billion yuan ($4.8 billion) of 28-day repurchase agreements yesterday, the first withdrawal in eight months. It didn’t offer any reverse contracts that add cash to the market. The PBOC gauged demand today for a sale of 28- and 91-day repos tomorrow, according to a trader at a primary dealer required to bid at the auctions.

“The PBOC did the repo operation to drain liquidity yesterday, which sent a signal that it does not want to ease further,” said Chen Qi, a Shanghai-based strategist at UBS Securities Co. “Still, overall liquidity conditions aren’t bad.”

The one-year swap, the fixed cost needed to receive the floating seven-day repurchase rate, climbed four basis points, or 0.04 percentage point, to 3.14 percent in Shanghai, according to data compiled by Bloomberg.

In a report on Feb. 6, the PBOC signaled inflation and the housing market remain concerns and said it will maintain a prudent monetary policy. The central bank last sold repurchase agreements on June 21.

Bond Auction

China’s finance ministry sold 26 billion yuan of 10-year bonds at a yield of 3.565 percent today, according to a trader at a finance company that participates in government debt auctions. The rate was the same as the median estimate of six finance companies surveyed by Bloomberg. The sale attracted bids for 2.86 times the amount on offer, the strongest bid-to-cover ratio since 2005, according to data from China International Capital Corp.

“Demand is strong because the financial system is flooded with cash as capital inflows rise,” said Chen Jianheng, a bond analyst at China International Capital in Beijing.

The seven-day repo rate, which measures interbank funding availability, gained three basis points to 2.95 percent, according to a weighted average compiled by the National Interbank Funding Center. The yield on the 3.15 percent government bonds due January 2018 fell two basis points to 3.26 percent, according to the Interbank Funding Center.

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