China Swaps at Four-Week High as Odds of Reserve-Ratio Cut Fade

Updated on
  • Yuan stability is PBOC's top priority: Bank of Dongguan
  • Sovereign bonds decline as seven-day repo rate steady

China’s one-year interest-rate swaps rose to the highest level this year on speculation the central bank will refrain from lowering lenders’ reserve requirements in the near term.

The People’s Bank of China is seeking to prevent the yuan, which has lost 3.4 percent in three months, from weakening further and wants to avoid burning through more of its foreign-exchange reserves. Attention will be payed to exchange-rate stability, and lowering the amount of cash banks must set aside as reserves sends a very strong monetary easing signal, according to a transcript of a PBOC meeting posted on on Friday.

The cost of one-year swaps, the fixed payment to receive the floating seven-day repurchase rate, rose two basis points to 2.36 percent as of 4:41 p.m. in Shanghai, data compiled by Bloomberg show. They increased to 2.37 percent earlier, the highest since Dec. 31.

“The central bank has become more cautious in cutting the reserve ratio and benchmark interest rates,” said Yu Yuanbo, an analyst at Bank of Dongguan Co. in Guangdong province. “The currency market now seems to have become its top concern” and easing is unlikely before at least March, he said.

The central bank has used various short-term lending facilities and open-market operations to inject about 1.6 trillion yuan ($243 billion) into the financial system this month as demand for funds increase before the week-long Chinese New Year holidays starting Feb. 8. The additions are acting as a “substitute for a reserve-ratio requirement cut,” according to PBOC economist Ma Jun.

The benchmark seven-day repo rate, a gauge of funding availability in the financial system, was little changed at 2.30 percent, a weighted average from the National Interbank Funding Center shows. The yield on sovereign bonds due October 2025 climbed one basis point to 2.91 percent, the highest since Jan. 6, according to National Interbank Funding Center prices.

— With assistance by Helen Sun, and Jeanny Yu

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