China Swap Rate Halts 8-Day Gain as Increase Deemed Excessive

China’s one-year interest-rate swaps halted an eight-day advance on speculation the increase to the highest level in almost two months was excessive.

The People’s Bank of China asked banks to submit orders for 28-day repurchase contracts and 14-day reverse-repurchase agreements this morning, said a trader at a primary dealer required to bid at the auctions. The monetary authority also gauged demand for sales of 91-day bills tomorrow, the trader said. Yuan positions at China’s financial institutions accumulated from sales of foreign exchange, a barometer of capital flows, fell 24.5 billion yuan ($4 billion) in July, declining for a second month.

“Local traders may judge that the previous upward move in front-end rates was a bit overdone,” said Frances Cheung, a senior strategist at Credit Agricole CIB. “That said, I don’t think one-year or two-year interest-rate swaps can come down meaningfully.”

One-year interest-rate swaps, the fixed cost needed to receive the floating seven-day repurchase rate, slipped six basis points, or 0.06 percentage point, to 4.13 percent as of 4:49 p.m. in Shanghai, data compiled by Bloomberg show. The rate touched 4.21 yesterday, the highest since June 25, and has increased 26 basis points since Aug. 8.

The seven-day repurchase rate, a gauge of funding availability in the banking system, slid 19 basis points to 4.32 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The rate reached 4.51 percent yesterday, the highest level since Aug. 2. It touched a record 12.445 percent on June 20 due to a cash squeeze engineered by the authorities to curb excessive lending.

“We think relatively tight conditions are likely to remain in the coming months,” Igor Arsenin and Rohit Arora, Singapore-based analysts at Barclays Plc, wrote in a report today. “Tight liquidity is a function of ‘prudent’ liquidity management by the PBOC, low foreign-exchange inflows and precautionary demand for excess reserves in our view.”

The government sold 31.7 billion yuan of 10-year bonds today at 4.08 percent compared with a 30 billion yuan target, according to a statement on Chinabond.com.cn, the Chinese government bond clearing website. The coupon was the highest rate since June 2008.

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