China's bill and bond yields mostly fell on Monday after a deputy central bank governor said China should maintain its current monetary policy, suggesting a shift to quantitative tightening is unlikely in the near term. Su Ning told a financial conference on Monday that the government's economic stimulus measures were having a clear effect in the first half of the year, but more time was needed to determine if China's economic recovery would continue.
The government announced on Monday that consumer price deflation worsened to 1.5 percent in April, against economists' forecast of 1.4 percent and March's 1.2 percent, while producer price deflation worsened to 6.6 percent, against economists' forecast of 6.5 percent and 6.0 percent in March.
The drop in consumer prices was mainly caused by the effect of a high base, as pork prices had risen sharply in early 2008, and the market widely expects deflation to persist in the second and perhaps the third quarter. Su Ning's comments suggested to traders that the central bank thinks loose money market liquidity is still needed for now to ensure the economic recovery is sustainable, despite increasing concerns over the outlook for inflation in the long term and the risk of an asset market bubble.
"The bond market is driven by liquidity now. Yields may keep edging down unless economic data can show fundamental improvements in the recovery," said a trader at a US bank in Shanghai. DBS Bank said in a research note on Monday that it had removed rate cuts from its forecasts. It now predicts that the benchmark one-year lending rate will stay at 5.31 percent and the one-year deposit rate at 2.25 percent for the rest of the year.
The indicative five-year government bond yield eased to a five-week low of 2.4209 percent bid from 2.4355 percent on Friday, its biggest daily drop since late February, according to Reuters Reference Rates.
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