Market Opening Seen Capping Yield Rise on Deficit
The 10-year bond yield may climb 12 basis points to 3.70 percent by year-end, according to the median forecast in a Bloomberg News survey of nine firms after the Ministry of Finance outlined its budget yesterday. The plan to allow a 50 percent jump in the deficit to 1.2 trillion yuan ($193 billion) was anticipated by the market, driving the yield 24 basis points higher since June 30 to 3.57 percent. Similar rates are 1.90 percent in the U.S. and 0.64 percent in Japan.
“The increasing issuance is not good news for the government bond market,” said Xu Hanfei, head of bond research in Shanghai at GF Securities Co., the nation’s third-biggest brokerage, who recommends investors favor shorter-dated debt. “On the other hand, the government may accelerate approval of more investors to enter the market to increase purchases.”
Premier Wen Jiabao and his probable successor Li Keqiang have committed to spending on roads, subways and low-cost housing to accelerate China’s urbanization and achieve a growth goal of 7.5 percent this year. The government also pledged to expand cross-border use of the yuan, encourage foreign investment and target inflation of 3.5 percent, down from a 2012 goal of 4 percent.
The 10-year yield reached a 14-month high of 3.61 percent on Jan. 29, compared with last year’s low of 3.24 percent on July 11, according to Chinabond data. GF predicts the yield will rise to 3.7 percent by the end of the year.
Appetite for China’s treasury bonds among global funds and prospects for currency appreciation are increasing as the market regulator raised investment quotas in the past year. Since 2003, regulators have approved a combined qualified foreign institutional investor quota of $40 billion as of Jan. 31 under the program which allows foreign investors to buy yuan- denominated securities, the State Administration for Foreign Exchange said on Feb. 4. That’s up from $36 billion as of Nov. 30. The authorities also scrapped limits on investment by sovereign-wealth funds and foreign central banks.
“The increased QFII quota to foreigners and allowing them to participate in the interbank market will definitely help to support the debt market,” said Chris Lau, a bond manager in Hong Kong at Bosera Asset Management Co., whose Shenzhen-based parent manages about $36 billion. Still, “potential supply will add pressure on the government bond yield,” he said, adding that he sees the 10-year yield at 4 percent by year-end.
The yuan, which has strengthened 1.4 percent in the past year, rose 0.1 percent to 6.2163 per dollar as of 12:16 p.m. in Shanghai. China’s one-year bond yield is 2.62 percentage points higher than that of the U.S. and the spread has widened from last year’s low of 1.99 points in June.
HSBC Holdings Plc estimated in a January report that sovereign issuance of Dim Sum bonds focused on foreign investors in Hong Kong will rise to 30 billion yuan this year, from 22 billion in 2012. The government is also expanding quotas for investors that raise yuan offshore for investment in China, the so-called Renminbi Qualified Foreign Institutional Investor program.
“Hong Kong investors have been factoring in currency appreciation and so accepting lower yields,” Pauline Loong, managing director of Asia-Analytica Research in Hong Kong, said yesterday. “Not only would offshore demand help lower yields for Chinese treasuries, it will also build momentum in the globalization of the renminbi.”
Bond risk for the nation has been falling this year. The cost of insuring China’s sovereign notes using five-year credit- default swaps fell five basis point to 62 in New York this year, according to data provider CMA, which is owned by McGraw-Hill Cos. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government fails to adhere to debt agreements.
Premier Wen said the nation lacks a sustainable growth model and faces mounting “social problems,” as he ends a decade in power that saw the economy grow fourfold to become the world’s second largest. Wen set a goal of curbing M2 money- supply growth to about 13 percent, following last year’s increase of 13.8 percent, to limit increases in living costs.
“The lower consumer prices target shows the government’s determination to control inflation,” said Chen Jianheng, a bond analyst at China International Capital Corp. in Beijing. “It will help damp inflation expectations in the bond market.”
He said the 10-year yield will be 3.5 percent at year-end. CICC estimates net issuance of central government debt in the interbank market may be more than 700 billion yuan, compared with 610 billion yuan last year, while the remainder may be sold to individual investors.
The central government’s 2013 budget shortfall will rise to 850 billion yuan from 550 billion yuan in 2012 and it will issue 350 billion yuan of bonds, from 250 billion last year, to cover the combined deficits of local governments, the finance ministry estimated yesterday.
Local governments piled on debt to help fund infrastructure projects as part of a 4 trillion yuan stimulus plan announced in November 2008 to cushion the economy from the impact of the global financial crisis. The finance ministry issued 200 billion yuan on behalf of regional authorities in 2009, 2010 and 2011. Local authorities also set up thousands of their own financing vehicles. The government is now trying to rein in their activities.
Policy makers “want to increase government bond issuance to replace the local-government financing vehicle bonds,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The government can issue bonds at a rate of 3.5 percent and the financing vehicles are paying 8 to 10 percent. It doesn’t make any sense.”
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