(adds comment from trader, detail on liquidity injections)
BEIJING, Dec 16 (Reuters) - China’s central bank made a larger than expected liquidity injection on Friday morning, helping push treasury yields down after interbank markets tightened following the U.S. Federal Reserve’s rate hike on Thursday.
The People’s Bank of China (PBOC) lent 394 billion yuan ($56.72 billion) via its medium-term lending facility (MLF) on Friday with rates unchanged at 2.85 percent for six-month loans and 3.0 percent for one-year loans.
The injection came amid signs of stress in the interbank market, with the overnight Shanghai Interbank Offered Rate (SHIBOR) set at 2.33 percent on Friday morning, the highest in 19 months.
“The market was in panic after plunges in the treasury futures and other rumors, but it stabilised soon after central bank support through MLF loans,” said a trader at a Chinese bank in Shanghai.
Following the injection, midday yields on the ten-year treasury came down 0.68 percentage points from the market open to 3.32 percent.
During the past month, the central bank had increased the cost of capital through open market operations in what analysts said was an effort to tamp down speculation. And the strain on liquidity in China’s financial markets became more acute following the Fed rate hike.
China’s benchmark 10-year treasury futures tumbled the maximum allowed 2 percent on Thursday, the biggest single-day fall on record.
In early trade Friday, the price of 10-year treasury futures had recovered 0.7 percent.
After draining 535 billion yuan last week, the PBOC injected a net 250 billion yuan into the banking system this week via open market operations, according to Reuters calculations.
And, to counter the market’s illiquidity, China’s securities regulator instructed some bond market makers to continue trading, two sources with direct knowledge of the matter told Reuters on Friday.
China’s central bank urged major commercial banks to lend to non-bank financial institutions on Thursday afternoon after many suspended interbank operations due to tight liquidity conditions, Caixin reported on late on Thursday.
The PBOC intervened to help institutions such as securities firms and fund managers after banks, including the big four state-owned banks, became reluctant to make loans, the financial magazine said, citing traders and institutional sources. ($1 = 6.9460 Chinese yuan renminbi) (Reporting by Beijing Monitoring Desk, Winni Zhou and Elias Glenn; Editing by Simon Cameron-Moore)