China Swap Rate Drops to One-Month Low on Loosening Speculation

China’s one-year interest-rate swap fell to the lowest level in more than a month on speculation the central bank will seek to bring down funding costs to support a slowing economy and curb the risk of defaults.

The cost of one-year swaps, the fixed payment for receiving the floating seven-day repurchase rate, fell four basis points, or 0.04 percentage point, to 4.79 percent as of 5:02 p.m. in Shanghai, according to data compiled by Bloomberg. The rate touched 4.765 earlier, the least since Dec. 16, after retreating 32 basis points last week.

The People’s Bank of China added a net 375 billion yuan ($62 billion) to the banking system via open-market operations last week, the most since last February, data compiled by Bloomberg show. Local markets will be shut from Jan. 31 through Feb. 6 for the Lunar New Year holidays. The injection came as a preliminary reading of the Purchasing Managers’ Index indicated manufacturing shrank the first time in six months in January, and as the market was worried a 30 billion-yuan trust product could default, the first of its kind in at least a decade.

“As the economy looks to be slowing down, interest rates are leading to financial difficulties for companies,” Xue Hexiang and Wang Jin, Shanghai-based analysts at Guotai Junan Securities Co., wrote in a note. “The injection should just be a prelude for loosening. It’s not just tactical.”

The yield on government bonds due August 2023 fell one basis point to 4.49 percent, according to the Interbank Funding Center. That was the lowest level since Dec. 4.

Trust Investments

China Credit Trust Co. said it reached an agreement to potentially sell trust assets, asking investors to contact their product managers as soon as possible, the company said on its website today. Industrial & Commercial Bank of China Ltd., the marketer of the trust product, told buyers they can receive back their full principal, according to an investor with direct knowledge of the offer.

The PBOC today asked lenders submit orders for 14- and 21-day reverse-repurchase agreements, as well as 28-day repo contracts and 91-day bills for this week, according to a trader at a primary dealer required to bid at the auctions.

The seven-day repurchase rate, a gauge of interbank funding availability, rose 12 basis points to 4.96 percent, according to a weighted average by the National Interbank Funding Center.

— With assistance by Helen Sun

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