China Bond Gains Push 10-Year Yield to Two-Week Low on Inflation

  • December consumer-price gains fall short of government target
  • One-year rate swaps rebound after biggest drop in two months

China’s 10-year government bonds rose, pushing the yield to the lowest in two weeks, on speculation that low inflation will allow authorities to add to monetary stimulus.

Consumer prices rose 1.6 percent in December from a year earlier, about half the government’s 2015 target, data from the National Bureau of Statistics showed Saturday. Producer prices have fallen for a record 46 months. The central bank is likely to lower lenders’ reserve requirement ratio before the Chinese New Year holidays starting Feb. 7, the Economic Information Daily cited analysts as saying on Monday.

The yield on notes due October 2025 fell for a third day, declining to 2.825 percent as of 5:30 p.m. in Shanghai, the lowest since Dec. 29, according to National Interbank Funding Center prices. It declined three basis points last week to 2.83 percent.

“These deflationary pressures are rooted in weak demand and must be countered by more decisive monetary and fiscal easing,” Julia Wang, Hong Kong-based Greater China economist at HSBC Holdings Plc, wrote in a note dated Jan. 9. The bank forecast reductions of 25 basis points in benchmark interest rates and 100 basis points in the reserve-requirement ratio in this quarter.

The central bank lowered the one-year lending rate to a record 4.35 percent last year, and reduced the reserve ratio for big banks to 17.5 percent from 20 percent in a bid to counter an economic slowdown.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose two basis points to 2.27 percent, data compiled by Bloomberg show. It declined eight basis points Friday, the most since October, on speculation the central bank would ease monetary policy over the weekend, according to David Qu, a Shanghai-based China rates strategist at Australia & New Zealand Banking Group Ltd.

The seven-day repo rate, a gauge of interbank funding availability, was little changed at 2.30 percent, a weighted average from the National Interbank Center Funding shows.

— With assistance by Helen Sun

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