China bill, bond yield drop

Chinese bill yields dropped on Friday because of ample liquidity and the bond curve steepened after a senior government economist said the GDP growth rate could hit 10 percent in the fourth quarter. Official media on Friday quoted Fan Jianping, chief economist with the State Information Centre, as saying that China's economic recovery was exceeding expectations and that full-year growth would be about 8.3 percent.
Banks were reluctant to buy bonds of long-term tenors because despite increasing confidence in a sustainable recovery, authorities may want to focus on addressing domestic imbalances and delay monetary policy tightening, fuelling concerns about inflation risks. Zhu Min, a central bank vice governor, appeared to echo official wariness about early tightening, saying on Friday that China was experiencing a V-shaped economic recovery but still faced tough challenges to restructure its economy.
The indicative five-year government bond yield was flat at 3.0954 percent on Friday but the 15-year yield edged up to 3.9611 percent from 3.9602 percent, according to Reuters Reference Rates. The 15-year yield may face strong resistance, however, at a 10-month high of 3.9633 percent hit in early August.
Interest rate swaps, which have often led the bond market this year, have been trending downward this month because of easing expectations of monetary policy tightening and concerns that the market overshot to the upside when it rose in October.
The onshore five-year IRS dropped to 3.54 percent on Friday from 3.56 percent on Thursday and a 10-month high of 3.72 percent in late October. In the bills market, traders focused on buying tenors of around one year, on expectations that the central bank may wait to see November economic data before deciding whether to guide its one-year bill auction yields and money market rates higher.
The one-year central bank bill yield in the secondary market eased to 1.8764 percent bid on Friday from 1.8773 percent on Thursday. Traders believe, however, that the spread between the primary and secondary market for the one-year bill yield may only narrow a few more basis points in coming weeks because of increasing money drains by the central bank to prevent yields from falling too far.
In a research note on Thursday, UBS said the central bank would increase sterilisation operations in coming months, including raising banks' reserve requirements if needed, to manage excess liquidity generated by expected large foreign exchange inflows. The weighted average seven-day repo rate climbed to 1.4837 percent by midday from 1.4703 percent on Thursday.