China Rate Swaps Snap Six-Day Gain as Reverse Repos May Resume

China’s one-year interest-rate swaps snapped a six-day run of increases as the central bank signaled it will conduct reverse-repurchase agreements, after last week scrapping the cash injections for the first time since June.

The People’s Bank of China today gauged demand for an auction of seven- and 14-day reverse repos tomorrow, according to a trader at a primary dealer required to participate in such operations. It sold repurchase contracts last week for the first time in eight months, withdrawing funds from banks after they lent the most money in two years in January. A net 910 billion yuan ($146 billion) was taken from the financial system in the week, more than double the previous record in Bloomberg data going back to March 2008.

“Speculation of policy tightening was overdone,” said Chen Qi, a Shanghai-based analyst at UBS Securities Co. Ltd. “The central bank gauged demand for reverse repos and it is fine-tuning liquidity, not reversing its policy.”

The one-year swap, the fixed cost needed to receive the floating seven-day repurchase rate, fell four basis points to 3.21 percent in Shanghai, according to data compiled by Bloomberg. It touched 3.29 percent yesterday, the highest level since Jan. 18.

The central bank refused to supply cash to banks yesterday after they applied for funds under a new program of short-term liquidity operations that was announced last month, Securities Times reported today, citing unidentified people.

Repo Rate

The monetary authority also asked banks today to submit orders for 28- and 91-day repurchase contracts, according to the primary dealer’s trader, who declined to be identified because the information isn’t public. Repos drain funds from the financial system and reverse repos, which involve short-term asset purchases by the central bank, add cash.

The seven-day repo rate, which measures interbank funding availability, climbed 44 basis points today to 4.27 percent, according to a weighted average compiled by the National Interbank Funding Center. It touched 4.28 percent, the highest level since Jan. 4.

China’s finance ministry sold 22 billion yuan of seven-year bonds today, according to its website. The notes were issued at an average yield of 3.43 percent, according to a trader at a finance company that participates in government debt auctions.

The yield on 3.55 percent government bonds due December, 2022 rose one basis point to 3.58 percent, according to data from the Interbank Funding Center.

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