China’s short-end government bonds are closing in on their biggest weekly drop this year, caught in a downdraft that’s swept up virtually all of the nation’s assets.
(Bloomberg) — China’s short-end government bonds are closing in on their biggest weekly drop this year, caught in a downdraft that’s swept up virtually all of the nation’s assets.
The yield on one-year yuan securities has jumped 13 basis points since Sept. 1, with analysts blaming the increase on dwindling liquidity and waning bets for broad-based easing. Interbank funding costs have shot up, reflecting the tightening cash conditions.
The selloff comes at an inopportune time for Beijing, which is scrambling to restore confidence after the economic recovery lost momentum and a property crisis showed few signs of easing. The offshore yuan is approaching a record low and global funds are giving Chinese equities the wide berth, raising questions as to whether authorities will step in to offer more support.
“Recent fading expectation for a reserve requirement ratio cut has some impact on the yields on one-year bonds and shorter tenures,” said Zhaopeng Xing, senior China strategist at ANZ Bank China. “Liquidity is expected to continue to be under pressure next week,” and the PBOC may inject short-term cash into the banking system in the coming days, he added.
Liquidity is drying up as analysts expect investors to mop up as much as 800 billion yuan ($109 billion) of special bond issuance this month. Banks are less willing to lend to each other in September as they prepare for regulatory checks at the end of the quarter, which may also add to the liquidity stress.
All this is exerting upward pressure on funding costs. The overnight repo rate soared 23 basis points this week to 1.90% while the 7-day rate climbed six basis points.
The increases come after the People’s Bank of China withdrew 784 billion yuan of short-term cash via open-market operations from the financial system so far this month, according to Bloomberg’s calculations.
To make matters worse, the central bank may be reluctant to deploy large-scale easing measures to avoid compounding the yuan’s weakness.
The benchmark 10-year government bond yield rose four basis points this week to 2.67%. The yield on the one-year note was at 2.08% on Friday.
The one-year bond yield is expected to trade at around 2% to 2.1% in the short term amid the tight liquidity conditions, said Dongchen Wang, director and fixed income portfolio manager at Ping An of China Asset Management (Hong Kong).
–With assistance from Jing Zhao and Qizi Sun.
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