China's bill and bond yields continued dropping on Friday in response to a strong auction of five-year bonds by Export-Import Bank of China. Exim Bank sold 10 billion yuan ($1.5 billion) of bonds at a yield of 2.04 percent, well below Thursday's indicative secondary market yield of 2.3060 percent bid for five-year financial bonds issued by policy banks, according to Reuters Reference Rates.
That pushed the secondary market yield down sharply to a multi-year low of 2.2190 percent on Friday. In sympathy, the five-year government bond yield fell to a multi-year low of 1.8264 percent from 1.8491 percent.
Expectations for more easing of monetary policy and the rising threat of deflation fuelled demand at the auction. Also, the market is entering a traditionally quiet period for bond issuance, making banks desperate for high-quality debt in which to park some of their ample funds.
"The auction yield was on the low side since there may be no more auctions of government bonds or policy bank bonds in the rest of this year," said a trader at a mid-sized Chinese bank.
In a research note on Friday, Royal Bank of Scotland revised down its forecast for China's gross domestic product growth in 2009 to 5 percent from 8 percent, partly, it said, because banks and suppliers had generally become less willing to extend credit. The forecast is believed to be the lowest published by a major foreign bank.
"Fear is playing an increasingly important role in the now more deregulated allocation of credit, as both banks and suppliers worry about their exposure to a slowing economy and rising defaults," RBS said.