China short-term rates fall as longer-term yields hit all-time highs

Fri Dec 13, 2013 1:12am EST

Related Topics

* PBOC skips open market ops, allows second drain
    * Tighter conditions pushing bond yields to record levels
    * Bank lending, shadow banking growth beat expectations

    By Pete Sweeney
    SHANGHAI, Dec 13 (Reuters) - China's short-term money rates
slid again this week as year-end inflows from fiscal revenues
eased liquidity conditions, but longer-term yields hit record
highs, showing the increasing anxiety in fixed income markets.
    China's benchmark liquidity indicator, the seven-day repo
, had declined nearly 24 basis points by midday Friday
to 4.31 percent, down from the previous Friday's close.
    Other short-term tenors posted similar declines, even though
the People's Bank of China (PBOC) abstained from open market
operations this week, allowing 37 billion yuan ($6 billion) to
drain out of the system. The drain's impact was offset by fiscal
revenues flowing into the money supply from the Ministry of
Finance, a phenomenon that occurs towards the end of every year.
    Analysts and traders say the PBOC is clearly moving to
increase net funding costs as it attempts to deleverage the
Chinese economy, focusing in particular on suppressing shadow
banking activities -- trying to rely mostly on the interbank
market to do so.
    "As intended by the central bank, the interbank market has
tightened since March as short-term interbank rates have risen
by 135bp in the past seven months," wrote Mike Werner and Hua
Cheng of Bernstein Research in a note sent to clients on Friday.
               
    "This has resulted in a sharp slowdown in half-on-half
growth of shadow financing from 20 percent to 8 percent over the
past six months."
    Bond prices dramatically reflect the trend. On Friday, an
auction of three-month bills issued by the Ministry of Finance
yielded a whopping 4.8690 percent, the highest of any finance
ministry bill issued this year.
    On Wednesday, an auction of seven-year bonds by the Ministry
of Finance returned a yield of 4.62 percent, a nine-year high,
while an earlier auction of three-month deposits on Tuesday set
a rollicking all-time high of 6.3 percent.
    At the same time, the official Shanghai Securities News
reported on Wednesday that average yields on trust loan products
-- assets which comprise the backbone of China's burgeoning
wealth-management product industry  -- crossed 9 percent in
November, their highest point this year. (The wealth-management
product industry is itself a major component of shadow banking.)
    However, new bank lending and total social financing beat
expectations in November, official data showed, with broad money
supply growth (M2) looking to surpass the PBOC's target by the
end of the year. (Total social financing is a homemade indicator
that measures all forms of credit creation in the economy,
including shadow banking.) 
    TSF jumped to 1.23 trillion yuan in November versus 856.4
billion yuan the month before, implying that non-bank-loan forms
of funding comprised nearly half of all credit creation in
November, compared to 40 percent in October.

SHORT TERM RATES: 
 Instrument      RIC               Rate*    Change (weekly,
                                            bps)**
 1-day repo      CN1DRP=CFXS          3.44           -20.05
 7-day repo      CN7DRP=CFXS          4.31           -23.94
 14-day repo     CN14DRP=CFXS         4.41           -54.46
 7-day SHIBOR    SHICNYSWD=           4.30              -25
 

*The volume-weighted average price (Vwap) at midday Friday
** Compared to the Vwap at market close the previous Friday
 
KEY INTEREST RATE SWAPS:
 Instrument               RIC          Rate     Spread (bps)*
 2 yr IRS based on 1      CNABAD2YF=      2.98             -2
 year benchmark                                 
 5 yr 7-day repo swap     CNYQB7R5Y=    4.8217            182
 1 yr 7-day repo swap     CNYQB7R1Y=    4.6967            170
 

*This spread can be seen as a proxy for forward-looking market
expectations of an interest rate cut or rise.                

GOVERNMENT BOND FUTURES
 Instrument                 RIC     Rate     Change (weekly,
                                             bps)
 Dec 2013 5 yr              CTFZ3     91.02           -51.05
 Mar 2014 5 yr              CTFH4     91.57           -54.75
 Jun 2014 5 yr              CTFM4     92.03           -52.73
 
        >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
    
    MARKET DRIVERS
    - Record-high Chinese debt yields highlight anxiety, buying
opportunity 
    - China regulator drafts new rules to tame shadow banking
 
    - China corporate financing squeezed as reform plans spark
rate spike 
    - Unprecedented securitisation plan aims to slow rapid money
growth 
    - China investors face bumpy ride as reform speculation
intensifies 
    
    DATA POINTS
    - Flows of external liquidity into China's money market
GRAPHIC: link.reuters.com/pem75t
    - Impact of maturing central bank bills and repos GRAPHIC: r.reuters.com/vyr95t
    - Chinese government bond curve steepens as growth fears
ease GRAPHIC: link.reuters.com/jyr95t
    - China's interest-rate swap curve steepens as growth
prospects improve GRAPHIC: link.reuters.com/ryr95t
    - China corp bond spreads widen on rate reform prospects
GRAPHIC: link.reuters.com/bas95t
    - China hot money tracker: Hot money returned to China in
Sept after two months of outflows GRAPHIC: link.reuters.com/saz74t
    
    
   >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>   

($1 = 6.0711 Chinese yuan)

 (Editing by Eric Meijer)
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