China Bonds Drop Most in Two Weeks as PBOC Optimism Reined In

  • PBOC's Ma highlights risks stemming from reserve-ratio cuts
  • Ten-year yield rises from near lowest level since January 2009

China’s 10-year bonds dropped the most in two weeks as the central bank’s chief economist damped speculation lenders’ reserve-requirement ratios will be eased by saying any adjustments should avoid causing too much volatility to short-term rates.

In deciding on changes, maintaining stable money rates should be considered a priority as inappropriate timing and scale can lead to unwanted policy transmissions into the real economy, Ma Jun, chief economist of the People’s Bank of China’s research bureau, wrote in a commentary. Excessive cuts may also worsen capital outflows, alleviating the intended impact of improving liquidity, he wrote in the Financial News newspaper.

The yield on sovereign bonds due October 2025 climbed three basis points to 2.85 percent as of 4:30 p.m. in Shanghai, according to National Interbank Funding Center prices. The benchmark 10-year yield sank to 2.80 percent this week, the lowest since January 2009, ChinaBond data show.

“It looks like the PBOC will become more cautious in using the RRR tool,” said Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management LLP, which oversees 4 billion yuan ($616 million) of fixed-income securities. “This has damped some people’s expectations of further monetary easing.”

The PBOC eased major lenders’ reserve-requirement ratios by 250 basis points this year to 17.5 percent to help keep borrowing costs low amid an economic slowdown. A further 250 basis points of reductions is expected by the end of next year, based on the median forecast in a Bloomberg survey published Dec. 23.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose one basis point to 2.32 percent, data compiled by Bloomberg show. It’s dropped 111 basis points this year. The seven-day repo rate fell one basis point on Wednesday to 2.42 percent, extending this year’s decline to 254 basis points, according to a weighted average from the National Interbank Funding Center.

— With assistance by Helen Sun

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