China’s Bonds in Biggest Two-Day Drop in a Month on Weaker Yuan

Updated on

China’s one-year sovereign bonds had the biggest two-day decline in a month on concern a weaker yuan will spur outflows as local assets become less attractive.

The currency fell as much as 2 percent to a four-year low before paring the loss to close 1 percent lower at 6.3870 per dollar. That followed a 1.8 percent drop on Tuesday, when the People’s Bank of China ended a de facto peg that had been in place for more than four months and weakened the yuan by the most in two decades. It said in a statement Wednesday that the fixing’s volatility will rise temporarily.

The yield on notes due July 2016 climbed 10 basis points for a second day to 2.4 percent as of 4:30 p.m. in Shanghai, National Interbank Funding Center prices show. The two-day increase is the biggest since July based on ChinaBond data. The yield on bonds due July 2025 was steady at 3.54 percent.

“The step taken by the central bank could intensify speculation of further yuan depreciation and capital outflows,” said Qu Qing, a Beijing-based analyst at Huachuang Securities Co. “Overseas institutions’ view on yuan bonds may change accordingly, reducing their attractiveness.”

The Ministry of Finance issued 30 billion yuan ($4.7 billion) of five-year bonds at a yield of 3.24 percent Wednesday, according to China Central Depository & Clearing Co. That’s higher than the median estimate of 3.19 percent in a survey Tuesday, and was the highest in similar auctions since April.

Offshore Bonds

Yuan-denominated bonds that are traded offshore also declined. Yield on five-year notes issued by Lenovo Group Ltd. due June 2020 jumped 24 basis points, the most in a month, to 4.94 percent, while that on China’s sovereign bond due June 2017 rose six basis points to 2.81 percent.

Notes issued by junk-rated developers also fell. Country Garden Holdings Co.’s 2020 notes slid 0.9 cents on the dollar, the most in two weeks, to 104 cents, according to data compiled by Bloomberg.

Credit-default swaps protecting Chinese sovereign bonds against non-payment for five years rose three basis points to 108, the highest in two years, according to CMA data.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, fell three basis points to 2.53 percent, after rising seven basis points Tuesday, according to data compiled by Bloomberg.

The benchmark seven-day repo rate, a gauge of interbank funding availability, rose four basis points to 2.44 percent, according to National Interbank Funding Center.