China yields fall, c.bank auction signals easing

SHANGHAI Oct 23 (Reuters) - Chinese bill and bonds yields mostly fell on Thursday after the central bank surprised the market by letting the three-month bill yield fall a steep 16 basis points at auction, in what traders viewed as a signal that it may ease monetary policy as soon as this weekend.

The central bank auctioned 20 billion yuan ($2.9 billion) of three-month bills in its regular open market operations on Thursday at a yield of 3.0310 percent, far below expectations of about 3.11 percent and down from 3.1939 percent last week.

On Tuesday, the central bank let the one-year bill yield tumble 20 basis points for a second week in a row to 3.5090 percent, a signal that it was engineering a downward leg in yields.

Traders believe that, in addition to one more interest rate cut before the end of the year, the central bank may also cut commercial banks' reserve ratios in order to ease money market liquidity to support the property market.

"Short-term bill yields face downward pressure because the central bank may now want to cut reserve ratios after it eased policies in the property market," said a trader at a major Chinese bank in Shanghai.

The government late on Wednesday announced a series of policy changes that will make it easier for people to buy their first homes, the latest stimulus to cushion a slowdown in the world's fourth-largest economy. (For story, click on [nLM444674]).

"(We are doing this) to cope with the possible fallout from the global financial crisis in China, to boost domestic consumption and to improve financial services for home buyers," the central bank said in a statement.

The 90-day central bank bill yield CN3MNFIX=R in the secondary market, which was flat on Wednesday, fell to an 11-month low of 3.3420 percent bid on Thursday from the previous day's 3.3540 percent, according to Reuters Reference Rates.

FOREIGN BANKS FROZEN OUT

The weighted average seven-day repo rate CN7DRP=CFXS, which had dropped for five straight days, bucked the day's downward trend with a bounce to 2.9975 percent by midday from a one-month low of 2.9218 percent on Wednesday. Traders see the repo rate falling to about 2.80 percent in coming weeks.

The three-month SHIBOR rate SHICNY3MD= fell to an 11-month low of 4.1842 percent on Thursday from 4.1940 percent on Wednesday.

While overall money market liquidity is fairly good, Chinese banks remained reluctant to lend uncollateralised funds in the interbank market to foreign banks because of renewed focus on the adverse impact of the financial crisis in the real global economy.

"Chinese banks still have no confidence to lend to us. Falling SHIBOR rates are fake numbers to us," said a trader at a European bank.

In the government bond market, traders bought bonds of five years and below because of fairly good money market liquidity.

But they avoided long-term bonds after a poor auction of 30-year bonds by the finance ministry on Wednesday, and because of worries of a bigger supply of such bonds in 2009.

While the government has not provided quantitative details or specific timing of a stimulus package, some analysts believe the finance ministry may issue government construction bonds with tenors of 10 years and above, totalling as much as 100 billion yuan in 2009.

"Long-term bond yields are only rising slowly because banks are unclear about the magnitude and timing of the fiscal stimulus," said the trader at a major bank in Shanghai.

The five-year government bond yield CN5YTFIX=R fell to an 18-month low of 2.9973 percent bid on Thursday from 3.0036 percent on Wednesday, but the 20-year yield CN20YTFIX=R rose to 3.7664 percent from 3.7500 percent.

Following are yields based on Reuters Reference Rates (bid):

CHINA YIELD CURVE (pct)

Oct 23 Pvs Day Change 7-day repo CN7DRP=CFXS 2.9975 2.9218 +7.57 bps 7-day SHIBOR SHICNYSWD= 2.9958 2.9171 +7.87 bps 90-day CB bill CN3MNFIX=R 3.3420 3.3540 -1.20 bps 1-year CB bill CN1YNFIX=R 3.4250 3.4590 -3.40 bps 5-year Tsy CN5YTFIX=R 2.9973 3.0036 -0.63 bps 15-year Tsy CN15YTFIX=R 3.5255 3.5264 -0.09 bps

Note: Repo rate is weighted average.

To see SHIBOR rates, please click SHIBOR=

For information on reference rates for central bank bills, treasury bonds and sovereign bonds, please click CNFIXINDEX.

To see a general guide to contributed price data, news and analysis, please click <CN/CONT1>.

($1 = 6.83 yuan)

(Editing by Edmund Klamann)