China 10-Year Yield Rises to Six-Month High as Growth Stabilizes

  • Average interbank borrowing cost most expensive in 20 months
  • Rate swaps climb for sixth day to highest since April 2015

China’s 10-year government bonds declined, pushing the yield to the highest level in six months, as signs of a stabilizing economy and tightening liquidity damped demand for safer assets.

The yield on sovereign debt due August 2026 rose seven basis points to 3.01 percent, according to National Interbank Funding Center prices. That’s the highest for a benchmark security since June 3, ChinaBond data show. A weighted average repurchase rate in the interbank market jumped to the highest level in almost 20 months on Wednesday, as China’s official factory gauge in November matched the post-2012 high.

China’s bond market has been hit by twin blows. Signs of stabilizing economic expansion are damping the demand for safer assets, while tightening interbank liquidity is forcing investors who have borrowed funds to unwind such positions as the trading strategy becomes less profitable.

“There was suspicion regarding the sustainability of the recovery, but economic data have been showing the stabilization continues, and this has been driving some traders to adjust positions,” said Shen Bifan, an analyst in the fixed-income department at First Capital Securities Co. in Shenzhen. “At the same time, the PBOC is showing its intention to keep the money market tightly balanced. This is leading to a negative sentiment on bonds, and the correction isn’t over yet.”

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose for a sixth day, jumping as much as 11 basis points to 3.33 percent, the highest in 20 months, before paring the increase to 3.31 percent.

The PBOC injected a combined 95 billion yuan ($14 billion) via open-market operations on Wednesday and Thursday, data compiled by Bloomberg show. The central bank also provided loans to some lenders via the Standing-Lending Facility on Wednesday, according to people familiar with the matter.

The overnight repo rate fell nine basis points to 2.32 percent, after rising to a one-month high of 2.41 percent on Wednesday, weighted average prices show.

— With assistance by Helen Sun

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