China's Ministry of Finance auctioned 30 billion yuan ($3.82 billion) of 15-year government bonds on Monday at a higher-than-expected yield, pushing bond prices down slightly in the secondary market.
However, most traders said they believed the rise in bond yields was due to a temporary tightening of money market liquidity and would not continue.
The latest half-percentage point hike in bank reserve requirements takes effect this Wednesday, while funds are leaving the market for corporate bond issues as well as a string of equity offers, particularly a $1.4 billion share sale by China Merchants Energy Shipping Co launched last Friday. "The higher auction yield isn't serious. It's due to tight liqudity before Wednesday and from corporate bond issues," said a trader at a Shanghai bank.
She predicted liquidity would improve after Wednesday, allowing short-term money rates to come back down. A trader at a foreign bank said bond yields would probably stay around current levels for the rest of this year. "Yields aren't going to rise further - liquidity will return to normal," he said. The 15-year government bonds were auctioned at 3.27 percent, bankers said, compared to market expectations of between 3.15 and 3.22 percent.
Cash-rich insurers did not show as much demand for the issue as expected. The bid-to-cover ratio was 1.53, near the low end of the range for government bond auctions in recent months. The auction result prompted a flurry of bond sales across the curve, especially at the long end, with the price of the Treasury bond due July 2021 falling to 109.82 on the stock exchange from 109.94 at Friday's close.
However, the market soon stabilised and bonds were generally mixed by midday. The 15-year yield was indicated at 3.2591 percent, only slightly up from 3.2518 percent on Friday, while the five-year yield was at 2.5691 percent against 2.5682 percent, according to Reuters Reference Rates.
The 7-day repo rate, the market's key measure of the tightness of short-term liquidity, rose as high as 3.90 percent on Monday morning, its highest level since early 2004.
There was talk in the market that the central bank might hike official interest rates by the end of this year. In a research note released on Monday, Singapore's DBS Bank predicted there would be one more rate hike of 27 basis points by end-year. However, most of the market continues to believe that an official rate rise is very unlikely in the next couple of months, traders said.
"The central bank won't hike rates unless fixed asset investment growth starts to rise sharply," said the foreign bank trader. October fixed investment growth is expected to be announced this Thursday, and a Reuters poll found economists predicting a median rate of 27.5 percent compared to 28.2 percent in the previous month.
Even if October growth accelerates, the central bank will probably wait to see one or two more months of data before making any decision on monetary policy, while watching the impact of the latest reserve ratio rise, traders said.
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