China Swaps Cap Longest Weekly Gain Since 2012 on Recovery Signs

  • Bearish sentiment on bonds spurring demand for hedges: analyst
  • PBOC drains 290 billion yuan this week via market operations

China’s interest-rate swaps had the longest stretch of weekly gains since 2012 amid speculation signs of stabilizing growth will keep the central bank from adding to monetary stimulus.

The cost of one-year swaps, the fixed payment to receive the seven-day repurchase rate, has climbed 12 basis points since April 22 to 2.68 percent as of 4:39 p.m. in Shanghai, rising for a sixth week, data compiled by Bloomberg show.

Demand for hedges increased this month as a gauge of Chinese bond prices headed for its steepest fall in 13 months amid improving economic indicators and concern that some debt securities may be subject to a higher tax from May 1. Bonds of policy banks will be subject to a higher levy from next month, when a 6 percent value-added tax replaces a business tax of 5.5 percent.

“Interest-rate swaps remain on the bid side, mostly because of the bearish bond sentiment,” said Frances Cheung, the Hong Kong-based head of rates strategy for Asia ex-Japan at Societe Generale SA. “Investors may also rely on the IRS market to hedge against their bond positions when it is not entirely flexible to sell bonds.”

The cost of one-year swaps pared gains after climbing as much as three basis points on Friday to 2.71 percent, the highest in a year. Recent Chinese data from manufacturing activity to credit growth have exceeded estimates.

The People’s Bank of China will keep benchmark interest rates on hold until the fourth quarter, according to economists in an April 15-20 survey.

The Bloomberg Local Sovereign Index, a gauge of the performance of government bonds, has declined 0.43 percent this month, the most since March 2015. The yield on 10-year China Development Bank notes has increased 14 basis points to 3.39 percent in April, while that on the benchmark sovereign note, which is exempt from taxes, advanced four basis points to 2.89 percent, ChinaBond data show.

The PBOC drained a net 290 billion yuan from the financial system this week after adding 475 billion yuan in the previous three weeks, data compiled by Bloomberg show. The central bank this month made a net 164 billion yuan in loans to commercial lenders via the Medium-Term Lending Facility as new agreements more than offset those matured.

— With assistance by Helen Sun

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