China bond yields up

China's bill and bond yields mostly rose on Friday after May economic data suggested that the recovery was gaining momentum. Traders believe bond yields may gradually rise in coming weeks as rising car sales and property investment in May eased some doubts over whether private sector investment would take hold later this year, which would be crucial for a sustainable recovery.
But the pace of rises in yields may be very slow given that the central bank may wait for the release of full second-quarter GDP data and other numbers, due in mid-July, before deciding whether to tighten liquidity, traders said.
The government announced that May industrial output growth rebounded to 8.9 percent year-on-year compared with 7.3 percent in April. Economists' forecasts had called for a rise of 7.5 percent, although two domestic newspapers had reported this week that the increase would come in at 8.9 percent. Retail sales in May rose 15.2 percent from April's 14.8 percent.
China's broad M2 measure of money supply growth slowed to 25.7 percent in May from 26.0 percent in April. Chinese banks issued 664.5 billion yuan ($97.3 billion) of new yuan loans in May, up from the 592 billion yuan in April. Liu Mingkang, chairman of the China Banking Regulatory Commission, said China must ask whether the positive signs in the economy are for real, with questions about the real estate sector.
But ING Bank said accelerating real estate investment growth due to authorities' desire to stimulate domestic demand imparts upside risk to their 7.5 percent full-year GDP growth forecast. Goldman Sachs said it was possible for May's brisk industrial output growth momentum to be maintained in June, which would boost actual second-quarter GDP growth above the bank's 7.0 percent baseline forecast.
The indicative five-year government bond yield edged up to 2.3845 percent bid on Friday from 2.3836 percent on Thursday, according to Reuters Reference Rates. Banks' wariness of buying bonds despite loose liquidity was evident in weak results in an auction of 16.3 billion yuan of three-year bonds by the finance ministry on behalf of the regional governments of Jiangxi, Guizhou and Anhui.
The yield came in at 1.72 percent, or 4 basis points above Thursday's secondary market yield of 1.6800 percent bid on three-year central government bonds , compared with Monday's regional bond auction which produced a yield of 1.70 percent, or only 3 bps above the previous day's secondary market yield of 1.6655 percent.
Interest rate swaps eased across the curve on minor profit-taking, after rising much faster than bond yields this week in response to domestic media reports on the robust rise in May industrial output. The onshore five-year IRS eased to 2.64 percent bid on Friday from Thursday's 2.74 percent, a high for the year. Traders do not see much room for IRS to fall further, however.
In the bills market, traders sold actively on expectations of tighter liquidity conditions because of an imminent resumption of initial public equity offers and as the central bank wants to put a floor under repo rates. The central bank conducted a net drain of 15 billion yuan this week, reversing from net injections in the previous three weeks, suggesting it wants to put a floor under money market rates. The 90-day central bank bill yield edged up marginally to 1.0270 percent from 1.0260 percent.