Chinese bill and bond yields mostly rose on Monday after Vice-Premier Li Keqiang said China's economic recovery was now solid, reinforcing expectations of strong economic growth. Loose global liquidity may cause commodity and oil prices to continue surging and eventually stoke Chinese inflation, offsetting expectations for Chinese industrial overcapacity and abundant food supply to keep a lid on prices, traders said.
The indicative five-year government bond yield rose to a one-year high of 3.0701 percent bid on Monday from 3.0607 percent on Friday, according to Reuters Reference Rates. Interest rate swaps, which are more sensitive to inflation expectations, have been surging faster than bond yields this month and appear poised to pause and consolidate within a range in coming days, traders said.
The onshore five-year yuan IRS rose to a fresh 13-month high of 3.68 percent on Monday, surpassing the previous high of 3.65 percent hit on Thursday and Friday. In the money market, traders believe bill yields may move sideways in coming days because investors remain cautious about bidding yields much lower despite ample liquidity, given the risk that the central bank may eventually guide rates higher.
The central bank's decision to keep the one-year bill yield at 1.7605 percent last week, the ninth auction in a row at that level, strongly suggested that it wants to keep money market rates stable for now. But many traders believe the upside risks in repo rates and bill yields remain bigger than downside risks for the coming months, with the central bank likely to raise the auction yield for one-year bills to about 2 percent by the end of the year.
"Guiding the one-year auction yield up to 2 percent would still be normal even if the central bank doesn't hike official interest rates," said a trader at a mid-sized bank in Beijing. The weighted average seven-day repo rate rebounded to 1.4720 percent by midday from its previous close of 1.4220 percent, the lowest level since early September and a level that traders see as an unofficial floor for the repo in coming months. But the 90-day central bank bill yield fell to 1.3346 percent bid on Monday from 1.3360 percent on Friday.