China IRS slump, but main money rate edges up after RRR cut

The People's Bank of China announced a 50-basis-point RRR cut after the market closed on Wednesday, which will take effect on Dec. 5, a shift in policy to ease credit strains and shore up an economy running at its weakest pace since 2009.

While the PBOC will inject nearly 400 billion yuan ($63 billion) into the banking system next week via the RRR cut, it is on course to drain a small 24 billion yuan in its regular open market operations this week.

Traders said the market believed the central bank would follow the move with other easing measures, possibly a benchmark interest rate cut as early as in the first quarter of 2012.

"Now that the PBOC has started making RRR cuts, the market will expect it to keep doing so in the future," said Liu Junyu, fixed income analyst at China Merchants Bank In Shenzhen.

"Bond yields will fall amid the optimism, although money market rates will drop more slowly since those rates are affected by money supply, which needs time to pick up despite the RRR cut."

The benchmark five-year IRS lost 9 bps to 2.85 percent at midday. The 10-year IRS was down 8 bps at 2.97 percent and the one-year IRS tumbled 15 bps to 2.80 percent.

China's benchmark money market rate, the weighted average seven-day repo rate, inched up to 3.9813 percent at midday from 3.9738 percent at Wednesday's close.

But the shortest overnight repo rate dropped to 2.9930 percent from 3.4320 percent while the 14-day repo rate fell to 4.2040 percent from 4.4132 percent.

Copyright Reuters, 2011