China Money Rate at Three-Month High as Leverage Curbs Seen

  • CSDC said to survey brokerages on use of leverage to buy bonds
  • SWS Research sees risks to the debt market following bull run

China’s overnight money rate climbed to the highest level in almost three months on concern funding costs will rise as authorities curb the use of borrowed money to finance bond purchases.

The China Securities Depository and Clearing Corp. is asking brokerages about their use of leverage in the exchange-traded bond market, according to people familiar with the matter. It said last month it may adjust the ratio that determines how much investors can borrow to buy new notes. Outstanding repurchase agreements in the interbank market, used by investors to amplify their buying power, surged in November to the highest since at least 2012 as a Bloomberg index of sovereign securities rallies for a record eighth quarter.

“Reports about the survey indicate regulators’ concern about the leverage in the bond market, and we don’t rule out the possibility that such behavior will be constrained,” Chen Kang and Meng Xiangjuan, analysts at SWS Research Co., wrote in a report Monday. “This brings risks to the bond market following the bull run.”

The overnight repurchase rate rose one basis point to 1.92 percent as of 4:49 p.m. in Shanghai, its highest level since Sept. 30, according to a weighted average from the National Interbank Funding Center. A daily fixing of the cost of borrowing among financial institutions was at a three-month high of 1.92 percent. That narrowed its spread with the 10-year sovereign yield, a measure to gauge profits in leveraged trades used by investors, to the least since April.

Bonds Drop

China’s proactive fiscal policy will be more forceful and the nation will “reasonably” set limits on local governments’ new debt for 2016, Finance Minister Lou Jiwei said at a meeting, according to a statement posted on the ministry’s website.

The yield on bonds due October 2025 climbed for a second day, rising two basis points to 2.84 percent, according to National Interbank Funding Center prices. The benchmark 10-year yield slid to 2.80 percent on Dec. 24, the lowest since January 2009, ChinaBond data show. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was steady at 2.29 percent.

— With assistance by Helen Sun

Before it's here, it's on the Bloomberg Terminal.