June 18, 2012 / 5:02 AM / 7 years ago

China money rates slump on flagging loan demand; IRS firm

 * Repo rates fall on sluggish loan demand
 * Traders expect little month-end rate rise
 * IRS rates rise, as banks hedge rising bond yields
 * Bond market over-reacted to recent easing, traders say
 By Gabriel Wildau
 SHANGHAI, June 18 (Reuters) - China money rates eased on
Monday on flush liquidity and weak loan demand from banks and
their customers, traders said.
 "Overall, conditions are still very loose. Large banks are
all offering money, but no one is taking it," said a dealer at
an Asian bank in Shanghai.
 "Loan demand is fairly weak. If you borrow money (in the
interbank market), there's no place to put it," he said.
 The benchmark weighted-average seven-day bond repurchase
rate fell 17.33 basis points to 2.5604 near
 The 14-day repo rate fell even more sharply
to 3.0944 near midday, down 32.75 bps from Friday's close. 
 Traders said they did not expect a significant cash crunch
near the end of June.
 Money market rates often rise near the end of the month, and
especially at the end of a quarter or half-year, as banks
scramble for cash to meet regulatory assessments such as the
loan-to-deposit ratio, as well as internal targets for interbank
or corporate deposits. 
 But with liquidity now ample, the Asian bank trader expects
most rates may fall further this month, with only a small uptick
in seven-day rates in the final week of June.
 In the interest-rate swaps (IRS) market, rates rose slightly
on Monday, as banks hedge against the ongoing rebound in bond
 One-year IRS rose 4 bps to 2.55 percent at
midday on Monday. Five-year IRS rose 5 bps to 2.85
 Following the cut in banks' required reserve ratio announced
May 12, bond yields tumbled, as the market viewed the cut as the
first in a series of RRR cuts and other easing measures.  
Recently, however, bond prices have corrected.
 "Some investors took profit in the last one or two weeks,
which is driving up yields in the central bank bills and central
government bonds. And the market was pricing in too much easing
after the rate cut," said a trader at another Asian bank in
 Benchmark one-year Chinese government bonds 
closed at an 19-month low of 2.11 percent on June 8 but had
rebounded to 2.29 percent at midday on Monday.
 Banks are now paying for IRS in order to receive seven-day
repo rate as a hedge against rising bond rates, since such rates
tend to move in tandem with the seven-day rate, the trader said.
                               Current  Prev close  Change
                                    (pct)           (bps)  
 7-day repo                        2.5588   2.7321     -17.33
 7-day SHIBOR                      2.5567   2.7196     -16.29
  Note: Repo rate is weighted average.
($1 = 6.3703 yuan)

 (Editing by Kim Coghill)
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