MNI CHINA MONEY WEEK: FTQ, Duration Flows Weigh On 10-Yr Ylds

     BEIJING (MNI) - A pick-up in risk-aversion, dovish signals from

policymakers and investors seeking the better returns seen in the 10-year sector

pushed long-dated China Government Bond yields lower this week, flattening the

yield curve in turn.

     --FLATTEN CURVE

     The front of the curve also saw selling pressure, as investors looked to 

extend duration with a move into higher-yielding longer-dated paper.

     One-year China Government Bond yields rose to 3.2856% from 3.2183% last

Friday, while the yield on the 10-year CGB fell to 3.5753% from 3.6028%, with

the curve flattening 9 basis points.

     With quarter-end approaching, liquidity conditions have tightened, despite

the PBOC's net injection of CNY340 billion via its open market operations this

week. The seven-day repo averaged 3.1256% this week, compared with 3.0748%.

     --FALLING 10-YR CGB YIELDS

     Escalating trade wars has increased investor risk-aversion, weighing on

stocks and pushing 10-year CGB yields lower. The Shanghai Composite Index fell

from 3021.90 last Friday to 2889.76 this Friday.

     With unfavourable economic conditions including slower credit growth, lower

investment growth and escalating trade wars, China's government has send some

early easing signals. Premier Li told an Executive Meeting held Wednesday that

China will conduct a targeted required reserve ratio cut to support credit

issuances to micro and small-sized companies, though the implementation date was

not announced. Notably, Li also said the liquidity will be kept "reasonable and

abundant," rather than "reasonable and stable."

     Neither the trade war or weaker economic condition will be solved or

improved quickly, likely underpinning the bond market through the second half of

the year.

     --SOME HEADWINDS

     There are headwinds for the market, including banks' weak bond purchase

intentions due to tighter regulations. However, a new index compiled by

CFETS-NEX shows their appetites picked up recently.

     On top of that, the potential rising supply of local government bonds in

coming months -- which could average around CNY700-800 billion in the next two

months.

--AUCTION RESULTS

     Appetite for policy bank bonds remained buoyant for most of this week on

the primary market, although supply pressure weighed on Wednesday. Medium- to

long-term bonds remain the preference for primary market investors.

                                   Issuance                            Secondary

               Issuance  Duration     Scale  Issuance  Bid/Issuance       Market

Bond Issuer        Date   (Years)     (Bln)     Yield         Ratio        Yield

--------------------------------------------------------------------------------

China

Development

Bank             Jun 19         1       5.7   3.6040%          4.60      3.8860%

China

Development

Bank             Jun 19         3       4.2   4.1094%          5.67      4.2215%

China

Development

Bank             Jun 19        10        10   4.3201%          2.61      4.3909%

Ministry of

Finance          Jun 20         1     45.05   3.2258%          1.87      3.2168%

Ministry of

Finance          Jun 20        10        45   3.5480%          2.07      3.5603%

Agricultural

Development

Bank of China    Jun 20         1         7   3.8402%          2.60      3.9629%

Agricultural

Development

Bank of China    Jun 20         3         7   4.2231%          1.98      4.2236%

Agricultural

Development

Bank of China    Jun 20         5         6   4.3456%          2.04      4.3611%

Agricultural

Development

Bank of China    Jun 20         7         4   4.4796%          2.47      4.4859%

Agricultural

Development

Bank of China    Jun 20        10         7   4.5128%          2.79      4.4985%

Export-Import

Bank of China    Jun 21      0.25         4   2.8900%          3.21      3.1910%

Export-Import

Bank of China    Jun 21         3         3   4.1989%          4.38      4.2839%

China

Development

Bank             Jun 21         5         7   4.1574%          3.39      4.2974%

China

Development

Bank             Jun 21         7         4   4.4046%          4.24      4.4850%

Ministry of

Finance          Jun 22      0.25        10   3.0400%          2.42      3.1024%

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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