China 10-Year Bonds Slump as Yuan Concern Curbs PBOC Easing Bets

  • PBOC meeting transcript shows focus on keeping yuan stable
  • Fund injections equal 100 bps RRR cut: Bloomberg Intelligence

China’s 10-year government bonds fell, pushing the yield up by the most since November, on speculation the central bank will be cautious in cutting lenders’ reserve requirements amid yuan-depreciation pressure.

The People’s Bank of China pumped more than 1.3 trillion yuan ($198 billion) into the financial system through various lending facilities this month to meet demand for funds ahead of the Chinese New Year holidays in the second week of February. That’s equivalent to about a 100 basis-point reduction in the reserve ratio, Bloomberg Intelligence estimates. The PBOC pays attention to the stability of the yuan’s exchange rate in managing liquidity, and lowering the amount of cash banks must set aside sends a very strong policy signal, according to the transcript of a meeting of the central bank posted on Friday.

The yield on sovereign bonds due October 2025 climbed 10 basis points, the biggest increase since Nov. 9, to 2.88 percent as of 4:40 p.m. in Shanghai, according to National Interbank Funding Center prices. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose three basis points to a three-week high of 2.34 percent, data compiled by Bloomberg show.

“It’ll be less likely for the central bank to alleviate liquidity tightening by cutting the RRR as it’s difficult to withdraw the funds,” Qu Qing, a Beijing-based analyst at Huachuang Securities Co., wrote in a note Monday. “By using various lending facilities the PBOC can have more flexibility, as it can drain funds when the contracts mature.”

Cash Injections

The PBOC plans to provide 1.6 trillion yuan to meet pre-holiday cash demand, and arrange 600 billion yuan to 800 billion yuan for medium-term liquidity support, according to Friday’s transcript. The central bank has injected almost 700 billion yuan via open-market operations and Short-Term Liquidity Operations, as well as 612.5 billion yuan through its Medium-Term Lending Facility this month, data compiled by Bloomberg show.

The world’s second-largest economy grew at the slowest pace in a quarter century in 2015 and intervention to prop up the exchange rate contributed to a record $513 billion drop in the nation’s foreign-exchange reserves.

The benchmark seven-day repurchase rate fell five basis points to 2.29 percent, a weighted average from the National Interbank Funding Center shows.

— With assistance by Helen Sun

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