China Bonds Drop as Rally Seen Losing Steam Without More Easing

Updated on
  • Ten-year notes rose sharply this month on easing speculation
  • Interest-rate swaps steady after declining for three days

China’s 10-year sovereign bonds fell for the first time in three days amid speculation their rally this month can’t be sustained unless the central bank eases monetary policy.

The yield on the notes due July 2025 rose two basis points to 3.08 percent as of 4:42 a.m. in Shanghai, paring its decline in October to 19 basis points, according to prices from the National Interbank Funding Center. The benchmark 10-year yield dropped to 3.04 percent on Oct. 14, the lowest since January 2009, ChinaBond data show.

Investors have been betting the slowest quarterly growth in six years will prompt the People’s Bank of China to ease further, after it cut interest rates five times since November. The monetary authority will probably use multiple tools including reserve ratios, open-market operations and other liquidity management facilities to keep interbank rates low and spur economic growth, Bank of America Corp. said in a note on Monday.

“The long-end no longer offers much value following the quick rally,” Qu Qing, a Beijing-based fixed-income analyst at Huachuang Securities Co., wrote in a note Wednesday. “If easing policies do not materialize in the short term, the bond market may be under pressure for a downward correction.”

The Ministry of Finance sold 28 billion yuan ($4.4 billion) of seven-year notes at 3.05 percent, the lowest in five years, according to a statement on the China Central Depository & Clearing Co.’s website.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, was steady at 2.40 percent and has dropped six basis points this month. The seven-day repo rate, a gauge of interbank funding availability, was little changed at 2.38 percent, a weighted average from the National Interbank Funding Center shows.

— With assistance by Helen Sun

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