China's central bank bill and government bond yields edged up on Friday morning, with poor demand at a bond auction by China Development Bank (CDB) indicating market caution over more official interest rate hikes.
Money market rates mostly fell, with the benchmark seven-day government bond repurchase rate falling 3 basis points, as liquidity supply improved, although traders saw limited potential for the rates to fall sharply amid lingering worries over another central bank hike in bank reserve requirement ratios (RRR).
The People's Bank of China announced the first interest rate hike this year on Tuesday and investors predict the central bank will move again over the medium term as consumer inflation is expected to remain at high levels, traders said. The government is scheduled to announce key economic data for January next week, with consumer price index (CPI) expected to rise to a more than two-year high of 5.3 percent from 4.6 percent in December.
Friday's auction yield of CDB's 20 billion yuan ($3.0 billion), 10-year fixed-rate bonds was set at 4.62 percent, significantly higher than market forecasts centering around only 4.44 percent. Traders said investors will now await the outcome of next Tuesday's PBOC operations to see if the central bank allows the action yield on its benchmark one-year bills to exceed the official rate. If so, it will give a strong signal the PBOC may raise interest rates again shortly.
On the money market, the weighted average seven-day repo rate, the main barometer of short-term liquidity supply, fell to 3.9286 percent from 3.9618 percent at Thursday's close. However, the shortest-term one-day repo rate rose slightly to 2.8943 percent from 2.8805 percent. China's money market has suffered an unprecedented liquidity squeeze from late last year to the Lunar New Year holiday, hit by a slew of unexpected government tightening steps including several rate hikes and four RRR rises.