Chinese bill and bond yields dropped on Friday as the market further scaled back expectations of interest rate hikes, driven in part by Beijing's determination to maintain a stable currency, which suggested concern about the economic growth outlook.
China's dismissals this week of US calls for yuan appreciation have bolstered expectations that the timing of a potential interest rate rise will be pushed back, with traders also noting that a rate hike would boost pressure for a yuan rise.
Authorities may continue to rely on quantitative policy and window guidance on credit to forestall asset bubble risks but may want to delay either raising interest rates or depegging the yuan from the dollar, which could cause a renewed dip in economic growth, traders said. "Bond yields are dropping because the authorities appear to be increasingly cautious on policy," said a trader at a European bank in Shanghai.
The indicative five-year government bond yield fell to an eight-month low of 2.7000 percent bid on Friday from 2.7317 percent on Thursday, according to Reuters Reference Rates. But interest rate swaps rebounded on Friday with the onshore five-year IRS edging up to 3.52 percent bid from the previous close of 3.50 percent, after plunging 27 basis points in the past week or so.
In the money market, traders also bought bills as they scaled back expectations for the likelihood of the central bank guiding up auction yields on its bills in open market operations and for a hike in banks' reserve requirement ratios. The weighted average seven-day repo rate eased to 1.6434 percent by midday from 1.6453 percent on Thursday and the 90-day central bank bill yield fell to 1.4243 percent bid on Friday from 1.4299 percent on Thursday.
But traders said big, cash-rich banks were hoarding longer-term funds because of the risk of tighter liquidity further out in the future even though current, short-term money was plentiful. The weighted average 21-day repo rate rose to 1.7260 percent from 1.6600 percent in tiny volume. "No one wants to lend out longer-term funds even when there is demand for them," said a trader at a mid-sized domestic bank in eastern China.