August 12, 2015 / 8:53 AM / 2 years ago

China onshore bond yields up, money rates flat after yuan devaluation

SHANGHAI, Aug 12 (Reuters) - Chinese onshore bond markets sold off on Wednesday following a two-day yuan depreciation which left China's currency down more than 3 percent since Monday.

Yields on Chinese treasuries and corporate debt of different tenors and ratings are mostly up 5 to 10 basis points since Monday, as traders priced in a less attractive spread in dollar terms against off-shore foreign currency assets.

The yield on the benchmark five-year treasury was up 9 basis points since Monday's close, to 3.26 percent. Five-year AA rated corporate debt was likewise up nine basis points to 5.63 percent.

The five-year sovereign credit default swap was up 0.73 percent on Wednesday to 102.45, its highest level since January.

Despite the action in the bond markets, money markets were broadly calm, in contrast to earlier in the year when a rapidly appreciating trade-weighted yuan was blamed for tighter conditions in the money market. [ID:nL4N0W81FB}

"The devaluation cannot cause capital flows in such a short time, but it will influence the money supplied to some extent, of course," said a trader at a Chinese bank in Shanghai.

"After the depreciation of the yuan, major banks are more cautious. Maybe they will reserve some money and hold on to see how the market reacts. So I believe there is still adequate money in the market but less liquidity," the trader said.

The volume-weighted average of the benchmark seven-day repurchase agreement rate was up 3 basis points from Monday's close to 2.44 percent by late Wednesday afternoon.

Money rates below 3 percent are generally considered accommodative by traders.

Money market rates, which spiked upwards in the initial stages of the equity sell-off in mid June, have since fallen back below 3 percent as the central bank injected liquidity.

After halting open market operations for several weeks in the late spring, the People's Bank of China has now injected a net 124 billion yuan ($19.27 billion) into money markets in 2015 as of last Thursday.

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MARKET DRIVERS

- China's muni bond market shows signs of stress after auction undersubscribed

- As China's stock market tanks, investors flee into government-backed bonds

- Market falls threaten to expose cracks in corporate China

- China's easing may prop up stocks, but risks rewarding speculators

- Explosive local govt debt issuance threatens China c.bank's easing efforts

- China's Jiangsu province sells 45 bln yuan in bonds in private placements

- China c.bank provides pledged supplementary lending to select banks - sources

- China Zhuhai Zhongfu poised to become 4th public onshore bond default

- China eases corporate bond issuance rules as yields keep rising

- China sovereign yields up, futures down sharply as new muni debt looms

- Reform takes back seat as China drives muni debt swap

- Slow municipal bond market may raise China 'fiscal cliff' risk

- China's Jiangsu province may delay April 23 debt auction - sources

- China to relax rules for foreigners trading on interbank market - sources

- China says local govt debt swap to cover over half of 2015 repayments

- China ready to cut rates again on fears of deflation

DATA POINTS

- Fiscal deposits drive interbank liquidity trends GRAPHIC: link.reuters.com/pem75t

- Maturing central bank bills and repos upcoming GRAPHIC: r.reuters.com/vyr95t

- Chinese government bond curve rises on rate reform expectations GRAPHIC: link.reuters.com/jyr95t

- China's interest-rate swap curve rises, flattens on liquidity fears GRAPHIC: link.reuters.com/ryr95t

- China corp bond spreads widen on risk aversion GRAPHIC: link.reuters.com/bas95t

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> ($1 = 6.4345 Chinese yuan) (Reporting by Nathaniel Taplin and the Shanghai Newsroom; Editing by Muralikumar Anantharaman)

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