China 10-Year Bond Yield Completes Biggest Quarterly Drop of '15

  • Five interest-rate cuts since November support demand for debt
  • Risk of a bond selloff next quarter is increasing: BofAML

China’s 10-year bonds rose this quarter, pushing the yield down by the most since the last three months of 2014, as central bank easing buoyed demand for sovereign debt amid a stocks rout.

The People’s Bank of China lowered benchmark interest rates for the fifth time since November last month and reduced lenders’ reserve-requirement ratios to spur an economy that’s forecast to grow at the slowest pace since 1990 this year. The monetary authority also injected cash into the financial system to keep a lid on funding costs that were being pressured as it intervened in the currency market to support the yuan.

“The monetary stimulus and weak economic fundamentals prompted investors to add to their positions in bonds,” said Frank Sun, a Shanghai-based bond analyst at CFETS-ICAP International Money Broking Co. “Investors are betting the economic data to be released in October will continue to be weak, and that will induce further easing measures.”

The yield on the benchmark 10-year notes fell 35 basis points this quarter to 3.25 percent, the lowest since July 2012, on Tuesday, ChinaBond data show. That’s slightly less than the 36 basis-points drop in the three months ended Dec. 31, 2014. The yield on the securities due July 2025 rose two basis points on Wednesday to 3.27 percent as of 4:30 p.m. in Shanghai, according to prices from the National Interbank Funding Center.

Asia’s largest economy will expand 6.8 percent this year, compared with 7.3 percent growth in 2014, according to the median estimate in a Bloomberg survey. A gauge of manufacturing held at a three-year low this month, a separate Bloomberg survey shows before the data due Thursday. The Shanghai Composite Index of shares is down 29 percent since June 30, the most since the first three months of 2008.

The 10-year sovereign notes are likely to be rangebound in the fourth quarter, as the risk of a selloff in China’s bonds is rising, Chen Yang, a Hong Kong-based rate strategist at Bank of America Merrill Lynch wrote in a research note on Monday. Signs of economic improvement and cheap valuations in the stock market are likely to divert funds, she said.

The seven-day repurchase rate, a gauge of interbank funding availability, is heading for a third quarterly drop, falling 22 basis points to 2.38 percent, a weighted average from the National Interbank Funding Center shows. It was rose two basis points on Wednesday. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, rose nine basis points during the period to 2.46 percent, after tumbling 117 basis points in the second quarter.

— With assistance by Helen Sun

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