Short-term notes find favour in post-crunch China

Chinese bond buyers favour short-term notes after yields spiked during the recent liquidity crunch.
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Chinese investors are taking advantage of the improved liquidity
<div style="text-align: left;"> Chinese investors are taking advantage of the improved liquidity </div>

The easing of China’s liquidity crunch is driving interest in short-term debt, as investors move to take advantage of an expected fall in yields and more active trading.

During last week, trading in short- and medium-term notes (MTN) started to rise, according to a report released by China Chengxin International, a domestic rating agency.

Yields for short- and medium-term notes moved up sharply during the liquidity crunch that started in early June, which means there is more room for a fall in yields of short- and medium-term notes, the China Chengxin report notes. Last week, as the central bank started open-market operations, the yield of one-year notes fell around 18%, compared to 50% on bonds with a duration of three-year or more.

“If the cash squeeze continues to ease, yields of shorter term notes will drop rapidly,” says a credit trader. “That’s what bond investors are expecting. They can make money in those notes with a higher rate of return.”

Another investor also points out that short-term notes are more liquid.

The latest example is the Rmb30 billion fixed-rate financial bonds issued by China Development Bank. Financial bonds are the most actively traded bonds in China and are issued by policy banks such as CDB, as well as by commercial banks and other financial institutions. Investors were closely watching the pricing of the bonds, as they are the first such issuance in the second half.

The five-tranche notes — one-, three-, five-, seven- and ten-year bonds — were priced on Monday at 3.91%, 3.9799%, 4.0205%, 4.0866% and 4.17%, respectively. The yields on the one- and three-year notes are much lower than the 4% minimum price that the market was expecting.

However, investors still found the prices attractive. The one- and three-year notes were covered around four times, compared to an average of about two times for the longer-term notes.

The People’s Bank of China on Tuesday released Rmb36 billion into the banking system, in the hope of further easing market anxiety and ending the liquidity squeeze.

Pressure in the interbank market has also been relieved, to some extent. On Wednesday, the benchmark weighted-average one-day repurchase rate slid 24bp to 3.47%, for a ninth day of easing, the longest period since March. The rate peaked at 13.91% on June 20.

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