China Bonds in Biggest Weekly Drop in Two Months as Easing Fades

  • Accelerating prices threaten end to nine-quarter debt rally
  • PBOC to pause easing as economic growth picks up, survey shows

China’s 10-year sovereign bonds capped the biggest weekly decline since January as signs of an improving economy reduced the chances of further stimulus.

Rising inflation is adding to the pressure, with data due next week projected to show that consumer prices accelerated for the fifth straight month. Seventeen of 19 traders and analysts surveyed by Bloomberg predicted that the People’s Bank of China will extend a pause in its monetary easing for fear of fueling price gains, even as it risks ending a record rally in bonds.

The yield on government notes due January 2026 climbed five basis points this week to 2.90 percent as of 4:30 p.m. in Shanghai, according to National Interbank Funding Center prices. That’s the biggest increase in a similar-maturity benchmark yield since the end of January, data from the ChinaBond clearing house show.

“The stabilization of the economy in the near term is surely happening,” said Qu Qing, a Beijing-based fixed-income analyst at Huachuang Securities Co. “This means a correction in the bond market is also certain.”

Bond Rally

The Bloomberg China Sovereign Bond Index advanced 23 percent in the past nine quarters as the economy expanded at the slowest pace in a quarter century and turmoil in the stock and currency markets drove investors to the relative safety of debt. Consumer prices may have climbed 2.4 percent in March, accelerating from a 2.3 percent increase in the previous month, according to a Bloomberg survey.

The PBOC auctioned 120 billion yuan ($18.5 billion) of seven-day reverse-repurchase agreements this week, compared with 395 billion yuan of such contracts due that will drain liquidity from the financial system, data compiled by Bloomberg show. That leaves a net withdrawal of 275 billion yuan, the most in a month.

The manufacturing Purchasing Managers’ Index for March unexpectedly rose above 50, the dividing line between expansion and contraction, for the first time since June, while industrial profits in the January-February period snapped a seven-month losing streak. A property market recovery also accelerated in February, with prices rising in the most cities since March 2014.

Repo Rate

The central bank last lowered the interest rate in its open-market operations in October, when it also cut its benchmark deposit and lending rates for the sixth time in less than 12 months. It has kept the reverse repo rate offered at 2.25 percent since then, while the rate traded between banks has averaged 2.32 percent.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, advanced three basis points this week to 2.35 percent, data compiled by Bloomberg show. That’s the biggest weekly increase in more than two months.

— With assistance by Helen Sun

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