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China Swaps Extend Rebound From 2012 Low as More Funds Drained

May 22, 2012

China’s one-year interest-rate swaps rose, extending a rebound from a 2012 low reached last week, as the central bank absorbed funds from the financial system.

The People’s Bank of China sold 60 billion yuan ($9.5 billion) of 28-day repurchase agreements at a yield of 2.8 percent today, according to a statement posted on the central bank’s website. The monetary authority is likely to continue to drain liquidity via repo agreements to offset the injection from last week’s cut in banks’ reserve requirements, Ju Wang, a Barclays Capital strategist in Singapore, wrote in a note today.

“We believe a very gradual recovery and easier monetary policy will keep rates low,” Ju said, adding that investors should “take advantage of the rates pullback as an opportunity to receive” fixed payments in the swaps market on expectations that policy easing will keep the trend of lower rates intact.

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, increased five basis points, or 0.05 percentage point, to 2.84 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The rate reached 2.67 percent on May 17, the lowest level this year.

“We think the PBOC will halt reverse-repurchase agreements this week after conducting such operations in the preceding two weeks, given current flush liquidity conditions,” Ju wrote.

The seven-day repurchase rate, a gauge of funding availability in the financial system, climbed two basis points to 2.69 percent, according to a weighted average compiled by the National Interbank Funding Center. The rate fell 107 basis points this month. The yield on 3.51 percent government bonds due February 2022 rose four basis points to 3.4 percent.

The Conference Board China Center for Economics and Business’s leading index rose at the same pace in April from the month before as it did in March, offering investors some comfort the world’s second-biggest economy may avoid a sharp slowdown. The gauge increased 0.8 percent to 232.4, the board said in an e-mailed statement today, citing a preliminary reading.

To contact Bloomberg News staff for this story: Kyoungwha Kim in Singapore at

To contact the editor responsible for this story: Sandy Hendry at

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