China’s 10-Year Bonds Rally as Inflation Slows to 18-Month Low

China’s 10-year sovereign bonds climbed this week, with the yield falling by the most in five months, on speculation the slowest inflation in 18 months will give the central bank more scope to spur growth.

Consumer-price gains slowed to 1.8 percent last month from a year earlier, official data showed today. Cooling inflation allows the monetary authority to maintain low interbank rates to ensure stable credit growth, Bank of America Corp.’s Hong Kong-based economists Ting Lu and Xiaojia Zhi wrote in a note today. China’s economy expanded 7.4 percent in the first quarter, the least in almost two years.

The yield on the 4.42 percent government bonds due March 2024 fell 18 basis points this week and nine basis points today to 4.12 percent as of 4:35 p.m. in Shanghai, according to data from the National Interbank Funding Center. That’s the biggest weekly drop for a benchmark 10-year sovereign note since the five days ended Nov. 29.

“Investors realize the central bank is tolerating low rates to support growth, and low inflation is providing room for that,” said Huang Hai, Beijing-based deputy head of the research department at SDIC CGOG Futures Co., a unit of State Development & Investment Corp. “However, the downside may be limited as there are already signs of growth rebound.”

The economy is increasingly likely to stabilize amid more signals that growth has bottomed out, the People’s Daily reported today, citing Liu Shijin, deputy head of the State Council Development Research Center.

Swap Rates

The cost of the one-year interest-rate swap, the fixed payment needed to receive the floating seven-day repurchase rate, fell 12 basis points this week and two basis points today to 3.64 percent, data compiled by Bloomberg show. It dropped to 3.6 percent earlier today, the lowest level since June 2013.

The seven-day repo rate, a gauge of interbank funding availability, fell 46 basis points, or 0.46 percentage point, this week to 3.17 percent, according to a weighted average compiled by the National Interbank Funding Center. It fell three basis points today.

China Zheshang Bank Co. plans to sell 10 billion yuan ($1.6 billion) of certificate of deposits this year, indicating an initial trial in 10 banks is expanding, the China Securities Journal reported today.

— With assistance by Helen Sun

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