China's Money Rates, Bond Yields Seen Dropping Further in 2016

Updated on
  • Overnight and 7-day repo rate will fall 30-50 bps, ANZ says
  • Sovereign note yields to decline 20-30 bps by end-2Q: ANZ

China’s benchmark money-market rate will drop to a five-year low in 2016, adding to the attractiveness of carry trades that will support government bonds, according to Australia & New Zealand Banking Group Ltd.

The People’s Bank of China will cut lenders’ reserve requirements further to revive the slowing economy, which will drive the seven-day and overnight repurchase rates down 30 to 50 basis points, David Qu, a rates strategist at ANZ in Shanghai, wrote in a research note dated Dec. 10. Sovereign note yields will decline by 20-30 basis points toward the end of the second quarter as investors borrow funds via repos to finance debt purchases, Qu said.

“As liquidity conditions remain accommodative and money-market rates stay low, carry-trade buying should remain strong,” he said. “The rapid growth of the asset-management sector should increase the demand for bonds.”

The seven-day repo rate, a gauge of interbank funding availability, dropped two basis points to 2.32 percent as of 4:30 p.m. in Shanghai, according to the National Interbank Funding Center. It hasn’t closed at 1.76 percent or less since November 2010. The overnight rate was little changed on Friday and this week at 1.77 percent.

Six interest-rate reductions since last November and several cuts to reserve-requirement ratios have pushed down money rates and spurred a rally in government bonds. A stocks rout in the middle of the year and a rising number of defaults of state-owned and private companies has also boosted demand for the relative safety of sovereign debt.

The yield on the government notes due October 2025 fell two basis points to 3 percent, taking its decline this week to five basis points, National Interbank Funding Center prices show. The benchmark 10-year yield has dropped 62 basis points this year, according to ChinaBond.

— With assistance by Helen Sun

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