Chinese bill and bond yields mostly fell on Friday after a strong auction of 91-day bills by the Finance Ministry, with money market liquidity expected to remain loose in coming months. The ministry sold 15 billion yuan ($2.2 billion) of the bills at an average yield of 1.2262 percent, well below the 1.3280 percent auction yield on bills of that tenor sold by the central bank on Thursday, although central bank bills lack the finance ministry bills' corporate income tax exemption.
Traders said the auction spurred renewed buying in the secondary market, with the indicative three-year government bond yield dropping to 2.4167 percent bid on Friday from 2.4176 percent on Thursday and a two-month high of 2.4344 percent on Wednesday of last week, Reuters Reference Rates showed.
The People's Bank of China is keen to avoid widening the US-Chinese interest rate gap, which would encourage capital inflows, and may also take only mild steps to control corporate lending, traders said. In the money market, the weighted average seven-day repo rate edged up to 1.4436 percent by midday from 1.4421 percent on Thursday as big banks prepare funds for investors ahead of a major initial public equity offer by China Merchants Securities.
But traders said funding demand from many financial institutions was actually weaker than previously expected, suggesting that underlying liquidity in the money market is balanced among big and small banks.
Many traders think the seven-day repo rate may rise to at least 1.6 percent at the height of fund-raising for Merchants Securities' IPO, well below this year's high of 2.145 percent hit in early August, when Everbright Securities' IPO locked up about 1.37 trillion yuan in subscriptions. The one-year central bank bill yield rose to an 11-month high of 1.8853 percent bid on Friday from 1.8848 percent on Thursday but the 90-day yield slipped to 1.3424 percent from a two-month high of 1.3442 percent.
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