China's benchmark government bond yields mostly edged higher on Friday, as jitters prevailed over the central bank's next move to tighten policy and ahead of expected high November inflation figures this weekend. Traders said expectations that last month's consumer inflation number would top October's 25-month highs reinforced market views that further rises in already high bank reserve requirements or policy rates lurked around the corner.
"The market was thick with rumours flying everywhere," said a dealer at a Chinese bank in Shanghai. "High expectations for a strong CPI number are leading us to believe that an interest rate hike will happen soon." But he said that if the PBOC did not raise interest rates this weekend, government bond yields could fall back gradually next week.
China's surprisingly strong November imports and exports data on Friday also paves the way for the central bank to raise rates as soon as this weekend. The Economic Information Daily reported on Friday that China's consumer inflation may have hit 5.1 percent in November.
The benchmark five-year bond yield rose 15 basis point to 3.65 percent at midday from 3.50 percent at the close on Thursday, while the 15-year yield was up 5 bps to 4.1500 percent. In spite of imminent monetary tightening worries, the benchmark weighted average seven-day bond repo rate eased 0.93 bps to 2.4840 percent by midday from Thursday's close of 2.5069 percent, retreating from recently lofty levels.
Dealers said liquidity in the money market was stable and the rate was merely adjusting after a spike when big banks, anticipating further tightening, led the market by tightening monetary conditions. The main barometer of short-term liquidity was below 2.0 percent before the PBOC's October 19 rate increase and has been volatile since as the market was divided over the government's next tightening steps.
It jumped 62 bps on Tuesday last week, touching a two-year high of 3.35 percent late last week, plunging 100 bps on Tuesday and then rebounding 31 basis points on Wednesday. Dealers said liquidity was not tightening for now, but as there were high expectations for a bank reserve ratio hike after the Chinese central bank skipped its three-year bills, the short-term repo rate was hovering at still-high levels.
The PBOC may be reluctant to raise interest rates, depending on other tools to drain money from the system, such as raising banks' reserve requirements for the sixth time this year. Earlier on Friday, China's Ministry of Finance auctioned 10 billion yuan ($1.5 billion) of nine-month bills in the interbank market at an average yield of 2.8451 percent.