HONG KONG: One-year swap rates in China are poised for their biggest weekly rise in nearly two months due to a cash crunch in the money market and rising inflation that has stoked speculation of a rate hike as early as the Lunar New Year next month.
One-year swaps rose to 2-1/2 year peaks of 3.48 percent, a 28 basis points jump on a weekly basis, after Thursday's data showed inflation on the boil.
The seven-day repurchase rate , the barometer of short-term liquidity, spiked 153 basis points to 7.64 percent, reaching its highest level in more than three years, battered by an unprecedented liquidity squeeze in the wake of a slew of official increases in banks' reserve requirement ratios (RRR).
Two-year swaps in India have also been hit by paying pressure this week with 2-,5-year swap spreads flattening to near two month lows of 48 bps, on price pressures.
Chinese consumer prices in December rose 4.6 percent, from a year earlier, above forecasts. Standard Chartered said in a report on Friday that a rate hike was possible during or shortly after China's week-long public holiday next month. It said it expected a total of three rate hikes in 2011, two in Q1 and one more in Q2.
India's headline inflation in India accelerated to 8.43 percent in December from a year earlier, raising expectations of a quarter point rate increase at a review next week.
Indonesian bonds, another pressure point for inflation within the region, too buckled under selling pressure, with two-year yields set to rise by more than 70 bps so far this week.
Despite the spike in swap rates, Citigroup strategists are reluctant to suggest any receiving trades in Asia as tightening money market conditions and higher official rates are expected to pressure market yields higher.
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