China Bond Yield Rises to Five-Year High on Rate Freedom Signals

China’s 10-year bonds fell, pushing the yield to the highest level since 2008, after the nation’s leaders reinforced a commitment to free up interest rates.

Market forces will be “decisive” in allocating resources, according to a communique released last night after a four-day economic planning meeting. The outline, which lacked specific details, elevated the role of markets, which was described as “basic” until as recently as last month, according to the official Xinhua News Agency.

The yield on the 4.08 percent government bonds due August 2023 increased one basis point to 4.46 percent as of 4:17 p.m. in Shanghai, according to data from the Interbank Funding Center. That was the highest level for a benchmark 10-year rate since August 2008, ChinaBond data show. The Ministry of Finance sold at least 28 billion yuan ($4.6 billion) of seven-year bonds today at a 4.515 percent yield, according to a trader at a finance company that participates in the sales. The median forecast in a Bloomberg survey was for a 4.36 percent yield.

“The expectation that interest-rate liberalization will be pushed forward is now deep-rooted in investors’ minds,” said Zhang Guoyu, an analyst at Orient Futures Co. in Shanghai. “This is why bond yields have been climbing steadily recently.”

The People’s Bank of China added 9 billion yuan to the financial system via seven-day reverse-repurchase contracts yesterday. The central bank asked lenders today to submit orders for 91-day bills, 28-day repurchase agreements, and 14-day reverse repos as usual before an auction tomorrow, according to a trader at a primary dealer required to bid at the sales.

Fiscal Reform

The communique also talked about building a modern fiscal system that supports the initiative of both central and local governments, stating that China needs to improve its budget management and taxation systems in a bid to make responsibilities of government agencies match properly with what they spend.

The cost of one-year swaps, the fixed payment needed to receive the floating seven-day repo rate, slipped three basis points to 4.36 percent, data compiled by Bloomberg show.

“The Third Plenum’s communique is not exciting,” Bank of America Corp.’s economists led by Hong Kong-based Lu Ting wrote in a report yesterday. As expectations on reforms were greatly raised in the past month, markets could be slightly disappointed, according to the report. The benchmark Shanghai Composite Index of shares fell 1 percent today.

The seven-day repurchase rate, a gauge of financing availability in the banking system, increased 14 basis points to 3.74 percent, according to a weighted average compiled by the National Interbank Funding Center. It touched 3.52 percent yesterday, the lowest since Oct. 21.

— With assistance by Helen Sun

Before it's here, it's on the Bloomberg Terminal.