China’s Debt Posts Biggest Quarterly Gain in Two Years on Easing

Chinese sovereign bonds posted the biggest quarterly increase in two years after the central bank eased monetary policy to spur economic growth.

The government notes have risen 3.9 percent since March, the most since the last three months of 2011, a Bloomberg index shows. The yield on benchmark 10-year securities fell 45 basis points to 4.05 percent this quarter through June 27, according to ChinaBond data. The yield on 4.42 percent debt due March 2024 was steady today at 4.07 percent as of 4:54 p.m. in Shanghai, National Interbank Funding Center figures show.

Premier Li Keqiang said this month that the authorities would ensure growth of at least 7.5 percent in 2014 after year-on-year expansion dipped to 7.4 percent in the first quarter from 7.7 percent in the preceding three months. The People’s Bank of China has cut some lenders’ reserve requirements twice this quarter and the State Council has announced a ‘mini-stimulus’ program including tax relief for small companies and increased spending on railways.

“The PBOC’s policy direction is to guide interest rates lower to ensure growth,” said Zhang Guoyu, a Shanghai-based analyst at Orient Futures Co. “If it continues to want lower financing costs to benefit the real economy, the 10-year yield may have further downside.”

The official Purchasing Managers’ Index for manufacturing may have climbed to 51 in June, the highest level this year, according to a Bloomberg News survey ahead of the statistics bureau’s data release tomorrow. Targeted cuts in reserve requirements have helped companies’ profitability, although the foundation for recovery isn’t solid, Caixin magazine reported on its website yesterday, citing Zhang Jianhua, head of the PBOC’s Hangzhou branch.

Money Rates

The seven-day repurchase rate dropped for a second quarter. The benchmark gauge of interbank funding availability declined 18 basis points, or 0.18 percentage point, from the end of March to 4 percent, according to a weighted average from the National Interbank Funding Center. The rate climbed 76 basis points this month as banks hoarded cash for quarter-end regulatory checks, and rose 15 basis points today.

“As the quarter-end effect fades, money rates are likely to drop,” Deng Haiqing, a fixed-income analyst at Citic Securities Co., wrote in a research note today. “There are ample funds at lenders now.”

The PBOC didn’t sell repurchase agreements in its June 26 auction window, refraining from using the contracts to drain cash for the first time in four months, and money-market operations added a net 12 billion yuan ($1.9 billion) to the financial system last week.

The central bank asked lenders to submit orders for 14-and 28-day repurchase agreements, seven- and 14-day reverse repos, and 91-day bills for this week as usual, according to a trader at a primary dealer required to bid at the auctions.

The cost of one-year interest-rate swaps, the fixed payment needed to receive the floating seven-day repo rate, fell 64 basis points this quarter to 3.65 percent, according to data compiled by Bloomberg. The rate increased 11 basis points today.

(An earlier version of this story corrected the size of bonds’ quarterly move in the 2nd paragraph)

— With assistance by Helen Sun

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