Chinas yield curve steepened further on Friday on signs that the economy was heading towards an early recovery while authorities would keep money market liquidity loose to facilitate debt sales. The central bank is set to conduct a surprise net injection of 41 billion yuan ($6 billion) into the money market this week after a combined net drain of 262.5 billion yuan in the previous two weeks.
That pushed the weighted average seven-day bond repurchase rate down to 0.9354 percent by midday from 0.9521 percent on Thursday. The indicative 90-day central bank bill yield slipped to 1.0850 percent bid from 1.0930 percent, Reuters Reference Rates showed.
And Premier Wen Jiabao estimated on Thursday that inflation would be around 4 percent in 2009. Many analysts think that is unrealistic - consumer prices rose just 1.0 percent in January, and may well have dropped in February - but it did indicate authorities saw a possibility of inflationary pressure increasing considerably in the second half of this year.
Loose money market liquidity pushed short-term bond yields down. Export-Import Bank of China sold 10 billion yuan of three-year bonds at a yield of 1.78 percent, at the low end of forecasts, with a healthy bid-to-cover ratio of 1.98 times. The pushed down the indicative secondary market yield for three-year financial bonds issued by policy banks to 1.9100 percent bid from 1.9140 percent.
But traders increasingly see little downside for yields. Local governments will be permitted to issue 200 billion yuan of bonds this year, some of which are expected to carry high yields because of greater credit risk. A sign that central government bond yields have generally bottomed is a narrowing spread to corporate bonds, as hopes for economic recovery encourage some funds to flow back to corporate debt from government debt.
The spread of the five-year AAA rated corporate bond shrank to 139 bps on Friday from 143 bps on Thursday and 184 bps in early January. Although bill yields dropped on Friday, trade was thin bcause the market does not expect any large fall from current levels, traders said.
The central bank is believed to want the seven-day repo to move in a range of about 0.90 to 1.05 percent in coming months, which would put a floor under bill yields. The spread between the one-year and 15-year government bond yields widened to a multi-year high of 268 basis points on Friday, far higher than its previous peak in recent years of 186 bps, hit in May 2007.
Comments
Comments are closed.