* Benchmark 7-day repo rate jumps 54 bps to fresh 2-year high
* May reduce need for PBOC to tighten until early February
* Tight money drives up IRS, bond yields
* 5-year IRS up 2 bps; 5-year bond yield gains 10 bps
By Lu Jianxin and Jacqueline Wong
SHANGHAI, Dec 21 (Reuters) - China's benchmark money market rate leapt 54 basis points to a fresh more than two-year high early on Tuesday, as traders reported an acute shortage of funds after a slew of official tightening steps.
The squeeze, unprecedent since the seven-day repo rate became China's benchmark for short-term liquidity conditions in the early 2000s except on a few occasions during mega equity initial public offerings (IPOs), may delay more tightening measures by the People's Bank of China in the near term, traders said.
The central bank raised bank reserve requirement ratios three times since it surprised the market by increasing official interest rates on Oct. 19 to clamp down on excessive liquidity partly driven by capital inflows.
But it now appears the PBOC may have over-estimated the market's liquidity situation and there is now an acute squeeze which may see the PBOC avoid tightening for the rest of this year or even until the Lunar New Year in early February -- a traditionally high consumer spending period.
"No money is what I can say,"" a trader said, describing the money market situation, adding that some major banks who typically are lenders, were also trying to borrow on Tuesday.
The weighted average seven-day government bond repurchase rate CN7DRP=CFXS rose to 4.0640 percent at midday from 3.5288 percent at the close on Monday after having repeatedly hit more than two-year highs since late November.
Tight money also helped push Chinese interest rate swaps and bond yields higher. Five-year interest rate swaps (IRS) CNYQB7R5Y= rose 2 basis points to 3.72 percent at midday, while 10-year IRS CNYQB7R10Y= jumped 15 bps to 4.08 percent.
In the government bond market, the benchmark five-year bond yield CN5YT=RR added 10 bps to 3.60 percent and the 15-year yield CN15YT=RR rose 5 bps to 4.05 percent.
The PBOC auctioned a symbolic 1 billion yuan ($150 million) of one-year bills in its open market operation on Tuesday at a yield of 2.3437 percent, flat from last week. Traders said it shows the central bank has no intentions to raise interest rates for now.
The PBOC also refrained from draining funds from the money markets via short-term bond repurchase agreements on Tuesday. It will conduct the other regular operation on Thursday.
With 28 billion yuan in central bank bills and repos maturing this week, the PBOC may end up with a net injection of money via its open market operations this week, for the sixth week. Last week, it conducted a net injection of 50 billion yuan into the market.
"Everybody is busy borrowing," said a trader. "Who has extra money to buy PBOC bills? In addition, the yields are so low."
Over the past several weeks, the PBOC has found it increasingly difficult to attract demand for its bills, as the yields offered at auction have lagged behind the cost of money in the secondary market.
Nevertheless, it persists on keeping auction yields on its bills low, apparently to cushion widespread expectations of another imminent rate hike, although such hikes are still seen inevitable in the long term due to high consumer inflation.
China's consumer price index in November rose to a 28-month high of 5.1 percent from a year earlier, with real interest rates having been negative since February.
Current Prs session Change
(Bid, pct) (bps) 7-day repo CN7DRP=CFXS 4.0640 3.5288 +53.52 7-day SHIBOR SHICNYSWD= 4.0800 3.5025 +57.75 90-day CB bill CN3MTB=RR 3.0000 2.8400 +16.00 1-year CB bill CN1YTB=RR 3.3500 3.2500 +10.00 5-year Tsy CN5YT=RR 3.6000 3.5000 +10.00 15-year Tsy CN15YT=RR 4.0500 4.0000 + 5.00
Note: Repo rate is weighted average.
To see SHIBOR rates, please click SHIBOR
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sovereign bonds, please click <CN/CONT203>, <CN/HIGHLIGHT>
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news and analysis, please click <CN/CONT1>
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> ($1=6.66 Yuan)