SHANGHAI: Chinese interest rate swaps edged lower on Thursday after the benchmark five-year IRS breached a key support a day earlier, buoyed by a senior central bank official's comments that China should tread cautiously in raising interest rates.
Yi Gang, a deputy governor with the People's Bank of China, told a business conference in Hong Kong on Wednesday that he was confident the government would be able to keep annual average consumer price inflation to 4 percent this year.
On Thursday, the PBOC kept the yield of its three-month bill auction in its regular open market operations unchanged, giving the market further confidence in a possible pause in official interest rate hikes.
"Yi's remarks appear to indicate that the PBOC is happy with the current levels of interest rates, and the IRS market has thus responded in line with the understanding," said a senior trader at a major Chinese commercial bank in Shanghai.
"But I personally don't know whether Yi's comments meant no rate hike in the near term; the central bank has got a reputation for surprising the market by making nearly every of its tightening steps since last October unexpected."
The benchmark five-year IRS inched down 2 basis points to 3.93 percent at midday on Thursday after breaching the key support at 4.0 percent on Wednesday thanks to Yi's comments.
One-year IRS lost 3 bps while the 10-year tenor fell 2 bps.
Offshore, both the benchmark five-year non-deliverable IRS and the 10-year NDIRS dropped 3 bps.
LIQUIDITY DRAINS
The PBOC auctioned 47 billion yuan ($7.2 billion) of three-month bills in its open market operations on Thursday at a yield of 2.7944 percent, unchanged from last week and within market expectations.
However, the central bank also drained 30 billion yuan via 91-day bond repurchase operations on top of an already heavy 135 billion yuan drain on Tuesday.
Compared with a total of 109 billion yuan in bills maturing this week, the PBOC is on course to conduct a net drain of 103 billion from the market this week, up sharply from a net drain of 49 billion yuan last week.
Supplementing the open market operations, the PBOC also announced a hike in bank required reserves last week, the third rise so far this year, which will freeze about 360 billion yuan when it comes into effect on Friday.
"I see no let-up of the PBOC's efforts to soak up excessive liquidity from the financial system in the near term," said a dealer at an Asian bank in Shanghai.
"Money market rates clearly indicate that there is still a cash abundance despite all recent PBOC liquidity drains."
Traders said liquidity conditions may not turn tight any time soon because there are hundreds of billions of yuan worth of PBOC bills set to mature in coming weeks and foreign capital appears to be continuing to flow into China on a large scale.
China's benchmark money market rate, the weighted average seven-day bond repurchase rate , fell 10 basis points to 2.6204 percent at midday from 2.7202 percent at Wednesday's close.
The shortest overnight repo rate fell to 1.8987 percent from 1.9102 percent while the 14-day repo rate dropped to 3.2213 percent from 3.2827 percent.
The PBOC has flooded China's financial system with huge amounts of base money as it buys the bulk of foreign exchange inflows into the country to help maintain the stability of the yuan.
Over the past decade, the PBOC has mainly used open market operations to help sterilise excessive liquidity boosted by heavy capital inflows betting on yuan appreciation.
Since late last year, the central bank has also more frequently used bank reserve rises as a weapon to mop up money.
Comments
Comments are closed for this article.