Chinese bond yields and interest rate swaps rose across the curve on Monday as the market's attention turned to inflation risks after crude oil prices hit a seven-month high, while a consensus emerged that yields had dropped too far last month. At an auction on Monday, regional bond yields rose for the first time since late April.
"Local government bond yields may edge up in coming auctions in response to a minor correction in secondary market bond yields as global oil and commodity prices rise," said a trader at a major Chinese bank in Shanghai. The finance ministry auctioned 13.8 billion yuan ($2 billion) of three-year bonds on behalf of the regional governments of Hunan, Fujian and Ningxia at a yield of 1.70 percent, up from the 1.67 percent yield on regional bonds sold on May 22.
The indicative five-year government bond yield rose to 2.3773 percent bid on Monday from 2.3664 percent on Friday, according to Reuters Reference Rates. It was the biggest daily rise in seven weeks. Last month, the five-year bond yield slipped below 2.36 percent, breaching lows in April and March around 2.39 percent that had been considered strong support, as signs of weakness in exports and other segments of the economy stirred doubts about the speed and sustainability of the recovery. The offshore five-year non-deliverable interest rate swap climbed to 2.52 percent bid on Monday from its previous close of 2.47 percent.
In the bills market, yields slipped back after mostly rising on Friday in anticipation of a possible announcement over the weekend of details of a planned restart of initial public equity offers, after the announcement did not materialise.
But traders believe yields may not fall much further, given that the central bank, which fears stoking future inflation, is unlikely to allow the seven-day repo rate to fall below the bottom of the 0.9 to 1.0 percent range that has prevailed throughout this year. The 90-day central bank bill yield slipped to 1.0230 percent bid on Monday from 1.0270 percent on Friday.