Three-year central bills yield drops unexpectedly

16:06, April 23, 2010      

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The yield for three-year central bills dropped 1 point unexpectedly after they were put on the market Thursday due to fears of over inflation and monetary policy tightening. The People's Bank of China had issued 90 billion yuan ($13.2 billion) in three-year central bills.

The yield Thursday was 2.74 percent, down 1 point compared with a week earlier. However, the yield for three-month bills stayed unchanged at 1.4088 percent compared with last week. Analysts previously forecasted that the yield for the three-year bills would stay unchanged at 2.75 percent.

"It's a little surprising, but the banks' demand for bills is strong, so it is reasonable for the central bank to decrease the yield," a securities analyst said.

As the Chinese government is curbing loans, many commercial banks face greater pressure in fund allocation, while the high rate of return and liquidity make the three-year bills popular in the market, according to a China Business News report.

So far, the central bank has soaked up 65 billion yuan from the financial market this week.

Analysts believe that the drop of the three-year bills this week strengthens the central bank's thinking that it will use the open market operation to regulate measures.

And on the other hand, the lower yield eases the previous expectation of the tightening monetary policy, which means that the Chinese government will not raise interests rate or the deposit-reserve ratio in the short term.

Ha Jiming, chief economist from the China Investment Corporation (CIC), said that the rise of interest rates usually happens when the consumer price index (CPI), a main gauge of inflation, increases for several consecutive months, but for now the probability of higher interest rates is slim.

However, there are still some analysts who say that the decline of the yields cannot mean a delay in raising interest rates and a tightening of the policy; and the large issuance amount, sufficient liquidity and decline in mortgage lending are the main reasons for the yield's decline.

A trader from a commercial bank said that this is simple thinking and the change in yields still needs to be followed.

Source: Global Times


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