China Sovereign Bonds Decline as Recent Rally Deemed Excessive

  • Economic stimulus expectations to limit losses, says analyst
  • PBOC drains a net 70 billion yuan in open-market operations

China’s 10-year sovereign bonds declined for the first time in four days on speculation some investors judged a recent rally to be excessive.

The yield on notes due July 2025 rose two basis points to 3.10 percent as of 4:15 p.m. in Shanghai, according to prices from the National Interbank Funding Center. The yield on the similar maturity benchmark declined 12 basis points in the last three days, the most since July, after the coupon in a government auction on Wednesday fell to the lowest in almost seven years.

“The rally has been too strong and too fast, and yesterday’s auction result was a bit surprising,” said Chen Peng, a fixed-income analyst at Fortune Securities Co. in Shenzhen. “So some people may choose to reap profits. Still, expectations of easing will cap any increase in yields.”

With consumer inflation moderating in September and third-quarter economic expansion estimated to slip below the government’s 7 percent target, HSBC Holdings Plc forecast cuts of 25 basis points in interest rates and 150 basis points in reserve-requirement ratios by the year-end. The central bank has already lowered borrowing costs five times since November.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, was steady at 2.42 percent. The seven-day repo rate, a gauge of interbank funding availability, fell two basis points to 2.39 percent, a weighted average from the National Interbank Funding Center shows.

The People’s Bank of China auctioned 50 billion yuan ($7.9 billion) of seven-day reverse-repurchase agreements on Thursday at 2.35 percent. It drained a net 70 billion yuan this week as maturing contracts exceeded injections, data compiled by Bloomberg show.

— With assistance by Helen Sun

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