China’s Swap Rate Posts Biggest Weekly Decline Since November

China’s one-year interest-rate swaps recorded the biggest weekly drop since November as the central bank stepped up easing efforts and the yuan rallied.

The People’s Bank of China lowered the interest rate it paid on reverse-repurchase agreements and drained the least amount of funds from the banking system in open-market operations since the Lunar New Year holidays that ended Feb. 24. The yuan in Shanghai rose the most this week since 2007.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, fell 22 basis points this week to 3.41 percent in Shanghai, data compiled by Bloomberg show. That’s the biggest drop since the period ended Nov. 28. The swaps declined 26 basis points, or 0.26 percentage point, on Friday.

“The PBOC’s attempts to bring down funding costs, combined with a reversal of the yuan’s performance, is quickly changing the market expectation about a tight liquidity outlook,” said Zuo Junyi, a Beijing-based fixed-income analyst at Founder Securities Co. “To deliver the promise of two-way volatility, we may see the yuan strengthening in the next few weeks, and that will help bring down onshore funding costs.”

The PBOC withdrew a net 25 billion yuan ($4 billion) this week, down from 53 billion yuan in the previous period. It also rolled over 350 billion yuan of three-month loans to commercial banks via its medium-term lending facility, and added an unknown sum to the facility, a person with knowledge of the matter who asked not to be identified because the information isn’t public said March 17.

Repo, Futures

The seven-day repo rate, a gauge of interbank funding availability, fell 50 basis points this week to 4.21 percent, according to a weighted average compiled by the National Interbank Funding Center. That’s the biggest weekly drop in two months. It declined 17 basis points Friday.

Yuan positions for foreign-exchange purchases at Chinese financial institutions rose in February for the first time in three months. The gauge of capital flows climbed 42.2 billion yuan from January to 29.3 trillion yuan, according to central bank data released this week.

The yield on sovereign bonds due September 2024 declined three basis points from March 13 to 3.49 percent, prices from the National Interbank Funding Center show. It fell six basis points Friday. The China Financial Futures Exchange allowed trading of 10-year government debt futures Friday, adding to the five-year contracts that have been available since 2013.

— With assistance by Helen Sun

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