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Chinese yields fall, curve steepens after further cut in short-term rates

By on January 24, 2022 0

SHANGHAI, Jan 24 (Reuters) – Yields on China’s benchmark government bonds fell to a key low on Monday for the first time in nearly 20 months after the central bank announced its latest rate cut and as Expectations are growing for further easing to stabilize the slowing economy.

China’s 10-year yield slipped below 2.7% for the first time since May 28, 2020, falling 2 basis points (bps) in early trading to 2.685% before returning. It last stood at 2.720%.

Sharper declines at the short end of the curve drove the spread between 2-year and 10-year Chinese government bond yields to their highest level since July 14, 2020.

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The 30-year yield slipped about 3 basis points to 3.2625%, its lowest since April 10, 2020.

“The short term is reduced by rate cuts, and the long term is not only affected by rate cuts but also by the economic outlook,” said Wei He, China economist at Gavekal Research in Beijing.

“The base-case scenario the market now believes is that economic growth will pick up in the coming months on further policy easing despite downward pressures for now (being) still significant, preventing long-term yields to drop a lot.”

The drop in bond yields came after China’s central bank on Monday lowered the cost of funding 14-day reverse repurchase agreements while pumping 150 billion yuan ($23.69 billion) into the banking system to ” maintain stable liquidity before the Lunar New Year”. Read more

Last Monday, China surprised markets by cutting borrowing costs on its medium-term loans for the first time since April 2020, and also lowering a short-term lending rate. On Thursday, Prime Lending Rates (LPR) were cut and on Friday, the PBOC cut rates on its loans under the Standing Lending Facility (SLF). Read more

Analysts expect more easing measures in China in the coming months, even as other major global central banks begin to tighten policy and withdraw unprecedented amounts of liquidity injected into their economies to cushion the impact of the COVID-19 pandemic.

“China has stepped up the intensity and frequency of its policy easing since late 2021,” Goldman Sachs analysts said in a note. “Policy support is becoming more evident in the tax and housing cohorts, and the rhetoric from policymakers has also become more pro-growth in recent months.”

($1 = 6.3325 Chinese Yuan)

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Reporting by Andrew Galbraith; Editing by Christopher Cushing and Kim Coghill

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