China's bill curve steepened on Friday because of budding concerns over future liquidity conditions, while bond yields mostly rose as investors locked in profits after recent sharp declines. Traders were reluctant to buy at the long end of the bills curve because of uncertainty over the People's Bank of China's (PBOC) future liquidity policy even though current funding conditions remain very loose.
The weighted average seven-day repo rate, which slid 12 basis points on Thursday, bounced to 1.7794 percent by midday from the previous day's 1.7211 percent in response to the PBOC's first weekly money drain in nine weeks. The one-year central bank bill yield edged up to 2.1273 percent from 2.1264 percent, according to Reuters Reference Rates. The PBOC is set to mop up a net 81 billion yuan ($12.0 billion) in its open market operations this week, reversing from injections totalling 937 billion yuan made over the previous eight weeks.
The comments did not signify to traders that China was so alarmed by its slowing economy that it will loosen policy imminently, despite rising uncertainties about growth in the United States and euro zone. The five-year government bond yield rose for a third straight day, to 2.5791 percent bid on Friday from 2.5682 percent on Thursday, and moving further away from its 10-month low of 2.5020 percent hit in late May.
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