SHANGHAI, Aug 20: China’s interest rate swaps (IRS) traded at three-month highs on Monday on tight liquidity and dampened expectations for monetary easing, with traders at a loss to predict when the central bank will cut banks’ required reserve ratio (RRR) further.
The rate on one-year IRS touched 2.98 percent on Monday morning, its highest since mid-May, while five-year IRS reached 2.99 percent, the highest since May 25.
‘There’s just no money,’ said a trader at a city commercial bank in Shanghai.
Though rates have risen across the curve in recent weeks, the short end has been hit the hardest, flattening the curve. The spread between five-year and one-year IRS closed at a near one-year high in late May at 31 basis points but had shrunk to a single point by midday on Monday.
The market has been widely expecting an RRR cut for nearly a month now to help spur the slowing economy, but the central bank has relied instead on using short-term reverse repos in open market operations to inject liquidity into the market.
Hopes for an RRR cut have now receded. Traders say a cut should still come sometime in the third quarter, but they dare not predict the timing.
In the repo market, rates were mixed, the benchmark weighted average seven-day bond repurchase rate dropping 23.34 basis points to 3.6566 percent at midday.
But most other repo rates were higher, with the overnight rate rising 16.05 bps to reach a three-week high at 3.3671 percent. The 14-day repo rate also surged by 33.34 bps to 4.4699, a six-week high.
Volumes were low, as banks prefer to wait to see if conditions ease following the People’s Bank of China’s (PBOC) regular auction on Tuesday.
‘There’s no need to take seven-day cash today because we can just wait and get it from the central bank tomorrow,’ said a trader at a major state-owned bank in Shanghai, explaining why the seven-day rate moved against the trend seen in other tenors.
The PBOC has mainly used seven-day reverse repos in recent months, but did sell a small amount of 14-day instruments last week.
Traders say the overnight rate could ease later this week, depending on the volume of reverse repos sold on Tuesday and Thursday.
But the seven-day rate is unlikely to fall below around 3.35 percent, since the People’s Bank of China has maintained the yield on its seven-day reverse repos at that level for the last month. That means banks would face negative carry on seven-day loans offered below that rate. ($1 = 6.36 Chinese yuan) (agencies)
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