China Rate Swaps Retreat From a Six-Month High After NCD Sales

China’s interest-rate swaps retreated from a six-month high this week after the first sales of negotiable certificates of deposit resulted in yields lower than interbank rates.

Five banks sold 19 billion yuan ($3.1 billion) of NCDs yesterday at yields of 5.1 percent to 5.2 percent. The rates were lower than the previous day’s Shanghai interbank offered rate, or Shibor, for three-month yuan loans of 5.33 percent. The People’s Bank of China has authorized the trading of such securities as part of measures to loosen controls over interest rates in the world’s second-largest economy.

“NCD issuance has been done and has come below Shibor,” said Kumar Rachapudi, a Singapore-based strategist at Australia & New Zealand Banking Group Ltd. “Shibor now seems to be stabilizing and that is helping market sentiment.”

The cost of one-year interest-rate swaps, the fixed payment needed to receive the floating seven-day repurchase rate, dropped 11 basis points to 4.74 percent in Shanghai from as high as 4.85 percent on Dec. 10, which was the highest level since June 20, according to data compiled by Bloomberg. The rate fell three basis points this week and rose four basis point today.

Moody’s Investors Service said in a statement yesterday that favorable investor demand for NCDs will lead to lower yields than interbank deposits or placements with similar tenors. That will help lenders better manage short-term liquidity and obtain long-term funds, it said.

Three-month Shibor was at 5.335 percent today, little changed from a five-month high of 5.338 percent on Dec. 10.

The benchmark money-market rate dropped for a fourth week, the longest run of declines since November 2012. The seven-day repurchase rate, a gauge of funding availability in the banking system, slid 24 basis points, or 0.24 percentage point, to 4.31 percent, a weighted average compiled by the National Interbank Funding Center shows.

“Government spending, which is typically heavier in the month of December, kicked into the system,” Rachapudi said. “That is helping the seven-day repo liquidity.”

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