July 16, 2012 / 4:58 AM / 5 years ago

China IRS rebound from 3-year low, await next policy move

* Benchmark 5-year IRS advance 6 bp on short covering
    * Likely to move in narrow range until next easing step
    * Money market rates slip on refunding of bank reserves
    * Expectations of RRR cut later this month linger

    By Lu Jianxin and Gabriel Wildau
    SHANGHAI, July 16 (Reuters) - China's interest rate swaps
rebounded on Monday, with short-covering pushing the benchmark
five-year IRS off a three-year low hit late last week, as
investors awaited further monetary policy easing from Beijing,
traders said.
    The five-year IRS rose 6 basis points to 2.62
percent at midday, up from Friday's close of 2.56 percent and a
three-year intraday low of 2.53 percent also hit on Friday.
    Five-year IRS are likely to move in a narrow range this
week, while fresh pledges by senior government officials to
support the economy spark expectations that China would continue
to take easing steps in coming months, traders said.
    "The potential for IRS to rise sharply is limited despite
today's rebound, as China is now in a monetary easing cycle,"
said a dealer at a Chinese commercial bank in Shanghai.
    "Instead, the market is awaiting another official easing
step, and if that happens this month, it could push the
five-year IRS to fall to test its three-year low again."
    One-year IRS rose 3 bps to 2.40 percent while
the 10-year IRS jumped 13 bps to 2.78 percent.
    China's economy has slowed sharply this year, with the
government posting a gross domestic product growth of 7.6
percent on Friday, its lowest growth in more than three years.
    The People's Bank of China (PBOC) cut banks' reserve
requirement ratios (RRR) twice, in February and May, and reduced
official interest rates twice in June and July.
    The official Xinhua news agency on Sunday quoted Premier Wen
Jiabao as saying that the government would step up efforts in
the second half of the year to support the economy, sparking
expectations of further easing, traders said.

    MONEY RATES SLIP
    Investors expected another RRR cut later this month,
especially if money market conditions remain tight, trader said.
    Money market rates fell slightly on a liquidity injection on
Sunday, one of the dates on which banks will adjust their
central bank reserves in line with the RRR.
    But short-term lending rates' remained relatively elevated
compared to their level for the month following the most recent
RRR cut in May, indicating that overall liquidity conditions
have yet to improve significantly, traders said.
    Banks saw deposit outflows in early July following the rush
of short-term deposits that banks typically draw in at the end
of each quarter. Now some funds previously locked up in the
central bank have been released back into the market.
    The benchmark seven-day weighted average bond repurchase
rate fell 6.72 bps to 3.2737 percent from Friday's
close of 3.3409 percent.
    The overnight repo rate edged down to 2.4749
from 2.4933, while the 14-day repo rate inched
down to 3.3104 percent from 3.3239 percent.
                                  Current  Prev close  Change
                                       (pct)           (bps)  
 7-day repo                        3.2737   3.3409     - 6.72
 7-day SHIBOR                      3.2746   3.3317     - 5.71
  Note: Repo rate is weighted average.
 
    ($1 = 6.3761 Chinese yuan)

 (Editing by Kim Coghill)

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