December 17, 2010 / 5:39 AM / 10 years ago

China yield curve flattens on weekend RRR jitters

 * PBOC operations signal RRR hike possible, but not rate hike
 * Short-term market rates jump but long-term yields stable
 * Key money rate heads for highest close in over 2 years
 * 7-day repo rate at 3.72 pct vs 2-year closing high 3.64 pct
 * 5-year IRS flat; 5-year bond yield inches up 3 bps
 By Lu Jianxin and Jacqueline Wong
 SHANGHAI, Dec 17 (Reuters) - China's short-term market rates
jumped but long-term yields remained stable on Friday, causing
the yield curve to flatten sharply as the market factored in
another bank reserve requirement ratio (RRR) rise at the weekend.
 Worries over official monetary or liquidity tightening steps
have become a chronic phenomenon in Chinese markets ahead of a
weekend since late October, when the People's Bank of China
surprised the market by raising official interest rates,
following through with a slew of RRR hikes.
 This week, the central bank kept the auction yields of its
bills in its regular open market operations unchanged -- a sign
that it prefers to use quantitative tools to another interest
rate rise for now.
 The PBOC sold few bills this week as yields are much higher
in the secondary market than in its auctions, and also refrained
from soaking up money via repos, indicating that if there is
fresh quantitative tightening, it will not go through the open
market but via another RRR rise. [ID:nTOE6BF016]
 "Policy trends appear quite clear-cut for now and the market
reponded accordingly," said a senior trader at a Chinese
commercial bank in Shenzhen.
 "Short-term market rates are likely to pull back early next
week if a RRR hike does not happen over the weekend, while the
long end of the curve has little potential to move sharply."
 The weighted average seven-day government bond repurchase
rate CN7DRP=CFXS, the main money market rate, rose 31 basis
points to 3.72 percent at midday, heading for its highest close
in more than two years now at 3.64 percent, hit on Wednesday.
 More significantly on Friday, however, was that the secondary
market yield of three-month central bank bills CN3MTB=RR jumped
77 bps to 2.7000 percent.
 The one-year bill yield CN1YTB=RR rose 29 bps to 2.8500
percent as traders reported market players were using a greater
variety of products to raise funds due to a more than 200-bp
spike in the benchmark seven-day repo rate since early November.
 Continuous cash drains via RRR hikes have kept liquidity in
China's money market under tight conditions, pushing money market
rates sharply higher recently.
 But there was little excitement among other tenors partly
because longer-term market rates had already factored in too much
anticipation of official rate increases, traders said.
 Five-year interest rate swaps (IRS) CNYQB7R5Y= were
unchanged at 3.81 percent at midday, while 10-year IRS
CNYQB7R10Y= inched 3 bps lower to 4.02 percent.
 The benchmark five-year IRS now implies four 25 basis-point
rises in the coming six months or a year, traders said.
 China's consumer price inflation in November stood at a
28-month high of 5.1 percent from a year earlier, signalling that
a potential rise in rates could still happen in the medium term.
Real interest rates have been negative since February.
 While many traders believe that chances for a rate rise this
year have now diminished, they still expect a rate rise is very
possible before the Lunar New Year in early February, a period
marked by high consumer spending and strong prices.
 In the government bond market, the benchmark five-year bond
yield CN5YT=RR edged up 3 bps to 3.57 percent and the 15-year
yield CN15YT=RR inched down 3 bps to 3.95 percent.
                          Current    Prs session  Change
                               (Bid, pct)         (bps)
7-day repo CN7DRP=CFXS     3.7230     3.4114       +31.16
7-day SHIBOR SHICNYSWD=    3.7008     3.3358       +36.50
90-day CB bill CN3MTB=RR   2.7000     1.9300       +77.00
1-year CB bill CN1YTB=RR   2.8500     2.5600       +29.00
5-year Tsy CN5YT=RR        3.5700     3.5400       + 3.00
15-year Tsy CN15YT=RR      3.9500     3.9800       - 3.00
 Note: Repo rate is weighted average.
 To see SHIBOR rates, please click SHIBOR               
 For more prices for central bank bills, treasury bonds and
 sovereign bonds, please click <CN/CONT203>, <CN/HIGHLIGHT>
 To see a general guide to contributed price data,        
 news and analysis, please click <CN/CONT1>               
 ($1=6.66 Yuan)

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