China Bond Yields Rise to Six-Week High as Easing Bets Recede

  • Infrastructure spending curbs to be loosened: State Council
  • Yields may continue to rise in coming months: Citic Securities

Chinese bonds declined, sending the benchmark yield to a six-week high, on speculation that policy makers will favor government spending over monetary easing as they seek to bolster the world’s second-largest economy.

Restrictions on infrastructure spending will be loosened and private investments will be encouraged in services sectors, the State Council said, as the authorities seek to meet this year’s growth target of at least 6.5 percent. The People’s Bank of China has refrained from lowering interest rates since October, while adding cash into the banking system through reverse repurchase agreements.

“The short-term trend for the government bonds to rise has been shaken,” said Cici Wang, a fixed-income analyst at Citic Securities Co. in Beijing. “The climb in the yields will likely continue in the coming one or two months, as investors expect China to use more fiscal policy and less monetary support to boost the economy.”

The benchmark 10-year bond yield climbed two basis points to 2.79 percent Wednesday after dropping to a decade-low of 2.64 percent on Aug. 15. The PBOC last month resumed cash injections via 14-day reverse repos for the first time since February, fueling speculation that it may be looking to cool a bond rally by increasing the use of more expensive funding than 7-day reverse repos.

The government will encourage policy banks to increase credit support to investment projects, while state-owned enterprises are being asked to step up spending in rural grid and telecommunication projects, the State Council said on its website Tuesday, citing a meeting chaired by Premier Li Keqiang the previous day. The statement came after the PBOC signaled that it has less room for any big monetary policy moves that could pressure the yuan.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, was little changed at 2.51 percent, data compiled by Bloomberg show. The benchmark seven-day repo rate rose two basis points to 2.3 percent, weighted average prices from the National Interbank Funding Center show.

Foreign Reserves

China’s foreign-exchange reserves shrank to the lowest level since 2011 as the central bank defended the currency. The stockpile fell by $15.9 billion to $3.19 trillion in August, the PBOC said Wednesday, in line with the median estimate in a Bloomberg survey of economists.

The onshore yuan rose 0.14 percent to 6.6640 a dollar as of 6:17 p.m., while the offshore exchange rate advanced 0.08 percent to 6.6698 in Hong Kong. The PBOC strengthened its daily reference rate by 0.18 percent to 6.6555 on Wednesday after a gauge of the greenback’s moves against peers fell overnight.

Odds that the Federal Reserve will raise U.S. borrowing costs later this month dropped by eight percentage points to 24 percent in the futures market on Tuesday after data showed an Institute for Supply Management gauge of U.S. services activity slumped to its lowest since February 2010.

Waning chances of higher U.S. rates support Chinese policy makers as they seek a balance between reining in fund outflows and opening up the nation’s capital markets to overseas investors. It will also make it easier for the nation to keep the yuan stable as it prepares for the currency’s inclusion in the International Monetary Fund’s basket of reserves next month.

— With assistance by Tian Chen

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