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CHINA’S first issuance of this year’s special sovereign bonds on Friday (May 17) is expected to see solid demand, according to strategists and gauges of sentiment in the bond market.
Thirty-year yields have edged lower since the Finance Ministry released its plan on Monday to sell one trillion yuan (S$190 billion) of ultra-long debt over a time span of about six months, beginning with a 40 billion yuan auction of that maturity. And interest-rate swaps, an indicator of expectations for short-term borrowing costs, briefly touched a four-year low onshore.
“These days banks still have too much idle cash and liquidity is flush, so I presume the auction will see good demand,” said Albert Leung, strategist at Nomura International.
The special bond sale will provide a clue of how demand for debt stands as sentiment swings between bullish expectations of further monetary easing by the People’s Bank of China (PBOC) to aid the economy and its bearish warning against excessively low yields. While a local bond rally has faded in recent weeks on fears over extra supply and a recovery in the stock market, the moderate pace of issuance may lead to an easing in concerns.
The 30-year notes are expected to see a yield of around 2.55 per cent at Friday’s auction, according to the median estimate of six traders who responded to a Bloomberg survey on Thursday who asked not to be named as they were not authorised to speak publicly. That is close to the current 30-year yield of 2.56 per cent in the secondary market.
For Ju Wang, head of Greater China FX & rates strategy at BNP Paribas, the market “will be able to absorb this issuance sufficiently well”. There’s a shortage of investible assets due to weak credit demand and the central bank is seen ensuring interbank liquidity will stay loose, she wrote in a note.
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The special bonds are part of government efforts to revive an economy afflicted with a property downturn and poor business confidence this year – and to ensure an ambitious annual growth target of about 5 per cent is met. It’s only the fourth time in 26 years that China has turned to this type of debt for fiscal stimulus, which allows it to target spending.
The auction comes amid signs that leaders are prioritising efforts to end the property market slump that’s weighing on the world’s second-largest economy.
The sales have brought more attention on China’s longer-maturity debt as the pipeline includes 20-year, 30-year and 50-year tenors, Bloomberg reported earlier this week citing sources familiar with the matter.
The reasonable range of long-term sovereign yields is likely to be 2.5 to 3 per cent from the perspective of “the normal operation of the market in recent years” and moves are expected to match long-term growth expectations of the domestic economy, PBOC-backed newspaper Financial News said on Friday, citing analysts.
“Rising debt supply as special bond issuance begins will make it harder for China’s bond rally to extend, but yields are not too likely to spike significantly either,” said Qi Sheng, an analyst at Orient Securities. “Sovereign bonds are still in large demand by domestic institutions.” BLOOMBERG
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