China Central Bank Sells 63-Day Reverse Repo for First Time

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  • Injection will reassure lenders about year-end liquidity
  • Yield on 10-year debt posts biggest weekly rise since January

China’s central bank injected 63-day money into the financial system for the first time, reassuring lenders about year-end funding availability while also intensifying a deleveraging drive by increasing costs.

The People’s Bank of China offered 50 billion yuan ($7.5 billion) of 2.9 percent 63-day contracts, according to a statement posted on the PBOC website, as well as 90 billion yuan through one-week and 14-day contracts.

For lenders, the longer-term funds -- though more expensive -- are a safeguard against any sudden liquidity squeezes as year-end regulatory checks loom and the PBOC focuses on paring back leverage in the financial system. China’s bond and money markets have been under pressure this month, with the 10-year yield rising to the highest level since 2014.

“The operation is aimed at smoothing liquidity volatility toward the beginning of next year,” said Li Liuyang, a Shanghai-based analyst at China Merchants Bank Co. “The cost of the two-month contracts also helps to fill in the gap in the interest rate curve” between the one-month reverse repo rate and the three-month Medium-term Lending Facility.

The central bank has been stepping up injections recently. It provided a total of 950 billion yuan in open-market operations over the past two weeks. That’s the most over a two-week period since January.

The cost of one-year interest-rate swaps, the fixed payment to receive the seven-day repurchase rate, rose three basis points to 3.61 percent at 4:52 p.m. in Shanghai, after touching a more than four-month high of 3.63 percent on Thursday. The overnight repo rate climbed four basis points to 2.76 percent.

The introduction of two-month agreements may lead to a reduction in the amount of money offered via shorter-term contracts, and consequently a higher average cost of funds provided to the banking system, Ji Linghao, an analyst at Huachuang Securities Co., said before Friday’s operations.

The yield on 10-year government bonds rose five basis points on Friday to 3.84 percent, taking this week’s increase to 10 basis points amid concern the economy’s strength, the deleveraging campaign and the advance in Treasury yields will further drive financing costs higher.

“The bond market is following its own logic, perhaps taking more cues from the economy and external markets amid weak sentiment,” said Luo Yunfeng, head of fixed-income research at Essence Securities Co.

— With assistance by Helen Sun, Xize Kang, and Ling Zeng

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