Jun 19, 2019 02:38 AM

China Bond Rally Seen Withstanding Surge in Local Debt Issuance

China is gearing up bond sales to support investment. Photo: VCG
China is gearing up bond sales to support investment. Photo: VCG

(Bloomberg) — A rally in Chinese sovereign debt is likely to withstand a surge in local government bond issuance this week, thanks to an abundance of funds available for investors to use.

The yield on 10-year government notes has fallen 19 basis points from this year’s high to 3.25%. That’s close to the lowest since April 2. Some 328 billion yuan ($47 billion) of local government bonds will be issued this week, the most this year, according to data compiled by Bloomberg. Despite the large issuance, demand for sovereign bonds should remain strong because the central bank is expected to inject more cash into the financial system, Oversea-Chinese Banking Corp. said.

“Theoretically, the increase of supply may dampen the demand. However, it also depends on interbank liquidity,” said Tommy Xie, an economist at the Singapore bank. “China will probably inject more liquidity to the interbank market to support the issuance and contain the spillover effect from the Baoshang seizure.”

The People’s Bank of China has stepped up efforts to ease market jitters with more liquidity following last month’s seizure of Baoshang Bank Co. ― the country’s first takeover of a bank in more than two decades. It said Friday it will increase liquidity support to smaller lenders amid a deepening economic slowdown.

The central bank injected a net 80 billion yuan via open market operations on Tuesday. That brings the total over the past four sessions to 390 billion yuan. A reserve requirement ratio cut for rural banks that the PBOC announced last month released about 100 billion yuan into the banking system Monday.

A glut of municipal debt is coming as local governments aim to issue 3.08 trillion yuan of new debt before September. Finance Minister Liu Kun said in March that authorities will work to speed up bond sales to stabilize investment. The quota for new municipal bond issuance might also increase later this year, Zhao Quanhou, a researcher at the Ministry of Finance’s Chinese Academy of Fiscal Science said Tuesday.

“While the issuance of local government bonds is relatively large this week, the central bank will match that with more liquidity,” said Yang Yewei, a macro fixed income analyst at Southwest Securities. The market is now more risk-off, and that will be positive not only for government bonds but also municipal debt and policy bank notes, he said.

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