From
Send to

China rate swaps rise as new repo rules spark bond sell-off

Dec. 9, 2014 - 21:09 By Korea Herald
China’s interest-rate swaps climbed to a three-month high, bonds dropped and stocks retreated after policy makers narrowed the pool of corporate debt that can be used as collateral for short-term loans.

China Securities Depository and Clearing Corp. has stopped accepting new applications for repurchase agreements that involve notes rated below “AAA” or sold by issuers graded lower than “AA,” according to a statement posted on the agency’s website yesterday. The move means that about 470 billion yuan ($76 billion) of outstanding corporate bonds regulated by the National Development and Reform Commission can no longer be pledged for repos, according to Haitong Securities Co.

“The regulation will damp investor demand for lower-rated corporate bonds,” said Yang Feng, a Beijing-based bond analyst at Citic Securities Co., the nation’s biggest brokerage. “That may result in higher borrowing costs for local government financing vehicles.”

One-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, rose 12 basis points to 3.50 percent as of 10:05 a.m. in Shanghai, according to data compiled by Bloomberg. It earlier jumped as much as 29 basis points to 3.67 percent, the highest since August.

The yield on Kashi Urban Construction Investment Group Co.’s 800 million yuan of debt due November 2019 climbed 75 basis points to 7.17 percent, the biggest jump since July, exchange data show. The issuer is an LGFV. China’s Shanghai Composite Index fell as much as 1.5 percent.

“As low-rated bonds cannot be used for repurchases on the exchange, this will force many financial institutions to deleverage,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Corp. “When there’s a liquidity issue, all bonds are sold off. They want to grab liquidity first today as you don’t know what will happen tomorrow.”

The yield on government debt due October 2019 surged 14 basis points, the most for a five-year note since November 2013, to 3.88 percent, according to prices from the National Interbank Funding Center.

The seven-day repo rate, a gauge of interbank funding availability, fell nine basis points, or 0.09 percentage point, to 3.39 percent, a weighted average compiled by the National Interbank Funding Center shows.

The monetary authority didn’t conduct repurchase or reverse repurchase auctions today, according to traders at primary dealers required to bid at the auctions. (Bloomberg)