Chinese bond yields fell and the curve steepened on Friday after a strong auction of one-year government bonds. The finance ministry sold 24 billion yuan ($3.5 billion) of one-year government bonds on Friday at a yield of 3.34 percent, near the low end of forecasts, which centred around 3.38 percent and ranged from 3.30 to 3.45 percent.
The auction yield came in well below Thursday's indicative secondary market yield of 3.4920 percent bid for one-year government bonds, according to Reuters Reference Rates, and lower than the 3.42 percent yield for one-year government bonds auctioned in June. In response, the secondary market yield on that maturity fell to a two-month low of 3.4855 percent on Friday. Traders said demand was strong at the auction since commercial banks were increasing positions at the short end of the curve because of uncertainty over the longer-tern outlook for inflation and monetary policy.
They said the downtrend in secondary market bond yields was likely to slow in coming weeks because the market had already mostly priced in a drop of August consumer price inflation, due to be announced next Thursday, to about 5 percent from July's 6.3 percent.
"Banks have already bought longer-term bonds in the past few weeks for their portfolio requirements, so they bought one-year bonds at the auction in order to avoid any policy risk later this year," said a trader at an Asian bank in Shanghai.
UBS said in a research note on Friday that consumer price inflation would not necessarily continue to fall in September, and could even rebound because of seasonal factors."The bond curve will steepen in late September, when the market expects inflation will rebound," UBS said. The five-year government bond yield only fell marginally on Friday to a two-month low of 3.9864 percent bid from 3.9880 percent.