China Swap Rate Drops to Two-Month Low as Reverse-Repo Rate Cut

China’s one-year interest-rate swap fell to a two-month low as the central bank cut the interest rate on reverse-repurchase agreements used to add funds.

The People’s Bank of China sold 20 billion yuan ($3.2 billion) of seven-day reverse repos at 3.45 percent Tuesday, according to a statement on its website, down from 3.55 percent at a similar auction last week. That’s the fourth cut since the start of March, each time by 10 basis points, after benchmark interest rates were reduced by 25 basis points in February.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, declined eight basis points to 3.18 percent in Shanghai, according to data compiled by Bloomberg. The contracts fell to 3.15 percent earlier, the lowest level since Feb. 5.

“This is a well-expected move as secondary market rates were already lower than the yields last week,” said Liu Changjiang, a Shanghai-based analyst at Essence Securities Co. “The PBOC is continuing efforts to guide interest rates lower, as the bond market isn’t really taking cues from previous cuts in the past month.”

The yield on China’s sovereign bonds due December 2024 rose five basis points, or 0.05 percentage point, to a one-week high of 3.64 percent, prices from the National Interbank Funding Center show.

The central bank added a net 5 billion yuan into the financial system last week, following an injection of 10 billion yuan in the period ended March 27, data compiled by Bloomberg show.

Supply Concern

The Ministry of Finance said in March that local governments will sell more than 1.6 trillion yuan of bonds this year, up from 400 billion yuan in 2014. That includes 600 billion yuan of new issuance and 1 trillion yuan to convert some high-cost maturing debt. The ChinaBond total return index fell 1.2 percent in March, the biggest drop since November 2010.

Anhui province will issue 32.2 billion yuan of notes as the first batch of a debt swap, the official Xinhua News Agency reported on April 4. The provincial finance department said Tuesday it will also sell 25.8 billion yuan of municipal general-obligation bonds in 2015, without giving the actual auction data.

Rising issuance will continue to be the key factor affecting the bond market, and what’s worse is that funds are leaving bonds for equities, analysts led by Beijing-based Qu Qing at Huachuang Securities Co. wrote in a note Tuesday.

The seven-day repo rate, a gauge of interbank funding availability, declined as much as 18 basis points to 3.22 percent, the lowest since Nov. 26, a weighted average compiled by the National Interbank Funding Center shows. It was last at 3.24 percent.

— With assistance by Helen Sun

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