China’s One-Year Bond Yield Slides This Week by Most Since 2012

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China’s one-year sovereign bonds rallied this week, pushing the yield down by the most since May 2012, after a cut in borrowing costs depressed money-market rates.

The yield on the benchmark one-year notes fell 33 basis points, the most since May 2012, to 2.36 percent Thursday, according to ChinaBond data. That on the securities due April 2016 rose one basis point to close at 2.38 percent in Shanghai, National Interbank Funding Center prices show.

The People’s Bank of China lowered interest rates for the third time since November on Sunday after first-quarter economic growth slowed to 7 percent, the least since 2009. The PBOC was said to have released a rule this week allowing banks to use municipal bonds as collateral for short-term loans, boosting demand for the notes. The overnight money-market rate slid for a record 20th day to 1.04 percent.

“We expect stronger monetary-policy easing to accompany the sales of municipal bonds,” said Huang Wentao, a Beijing-based analyst at China Securities Co. “The yield curve will probably continue bull steepening, as the economy may be yet to see the bottom.”

Bull steepening is when short-term interest rates fall faster than long-term ones. The yield on the sovereign bonds due April 2025 rose two basis points, or 0.02 percentage point, to

3.40 percent this week, according to National Interbank Funding Center prices.

Muni Sales

Jiangsu province will kick-start this year’s 1.8 trillion yuan ($290 billion) of planned municipal-bonds sales on Monday. Such notes can be pledged to get loans from the PBOC using the Standing-Lending Facility, Medium-Term Lending Facility, and Pledged Supplementary Lending, according to a circular jointly issued by the central bank, the Ministry of Finance and the China Banking Regulatory Commission and seen by Bloomberg.

The seven-day repurchase rate, a gauge of interbank funding availability, slid 40 basis points from a week ago and nine basis points on Friday to 1.88 percent, according to a weighted average by the National Interbank Funding Center. That was the 11th weekly drop.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, fell 26 basis points this week to 2.22 percent, data compiled by Bloomberg show.