MNI CHINA MONEY WEEK: Long-term Bond Rally Helps Flatten Curve

     BEIJING (MNI) - China's government bond curve continued to flatten this

week, with the longer-end of the curve again outperforming.

     The yield on the 1-year CGB rose 5.34 basis points in the week, with the

yield on the benchmark 10-year falling almost 6 basis points, with the spread

narrowing more than 11 basis points.

     Rates of negotiable certificates of deposit remained high through the week,

with the rate on three-month NCDs issued by city commercial banks rising from

4.4963% last Friday to 4.5368% now, despite net issuance of -CNY7.5 billion this

week. Weaker NCDs added to the upward pressure on short-term bond yields.

     --LONG-DATE YIELDS LOWER

     However, a stream of better news helped drive longer-term yields lower over

the period.

     U.S. Treasury yields fell this week, driven by fairly dovish Fed minutes.

Ten-year UST yields dipped from 3.06% last Friday to 2.98% today. Lower US

10-year UST yields pushed the 10-year U.S.-China spread back up to 67 basis

points this week, reapproaching the 80-100bps "comfort zone" mentioned recently

by PBOC Governor Yi Gang. If long-term USTs yields have more downside, there

will be greater room for CGBs to see lower long-term yields.

     Money market liquidity condition remained relaxed this week. Even with

month-end  approaching, there are no signs that liquidity will be pressured in

the last week of May. Seven-day deposit repo and repo averaged 2.6923% and

2.8521% respectively this week, remaining at a low levels. Stable liquidity

condition will benefit carry trades and some traders note many financial

institutions have started to extend their portfolio duration.

     --LACK OF SUPPLY

     CGB supply also favored bonds, with no long-term CGB issuances this week

helping push longer-date yields lower in the secondary market. The issuance plan

for next week also sees no issuances for long-term CGBs. This will buoy demand

for longer-term CGB in the short run, although investors will be minded that

supply pressures are only delayed, not cancelled.

     This helped drive 10-year China Development Bank bond yields lower -- which

are more actively traded than CGBs and thus more sensitive -- down nearly 10

basis points this week from 4.5431% on last Friday to 4.4450% on Thursday.

     The favorables supporting longer-term bonds are not likely to change

dramatically in the short-term, underpinning the environment for longer-term

bonds in the short run.

--AUCTION RESULTS

     With only CNY10 billion CGB issuance this week, there was strong demand for

policy bank bonds. Multiple bonds saw the cover ratio above, or very close to,

4, helping push primary market yields lower than secondary market levels. 

                                   Issuance                            Secondary

               Issuance  Duration     Scale  Issuance  Bid/Issuance       Market

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

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

Agricultural

Development

Bank of China    May 21         2         4   4.0954%          3.16      4.1598%

China

Development

Bank             May 22         1       7.4   3.6621%          4.51      3.8659%

China

Development

Bank             May 22         3       6.3   4.1946%          4.07      4.2857%

China

Development

Bank             May 22         5       6.1   4.2962%          4.14      4.4400%

Agricultural

Development

Bank of China    May 23         1         8   3.7969%           2.6      3.9224%

Agricultural

Development

Bank of China    May 23         5      7.53   4.3700%          2.98      4.4983%

Agricultural

Development

Bank of China    May 23         7      4.58   4.5002%          4.14      4.6057%

Agricultural

Development

Bank of China    May 23        10         7   4.5768%           3.7      4.6400%

China

Development

Bank             May 24         7         4   4.4490%          4.75      4.5676%

China

Development

Bank             May 24        10        12   4.3935%          3.01      4.4520%

Export-Import

Bank of China    May 24      0.25         3   2.8200%          3.89      3.0724%

Export-Import

Bank of China    May 24         3         4   4.2403%          3.38      4.3098%

Export-Import

Bank of China    May 24         5         4   4.3451%          3.87      4.4572%

Ministry of

Finance          May 25      0.25        10   2.8000%          2.09      2.8066%

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

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

[TOPICS: MTABLE,M$A$$$,M$Q$$$,MX$$$$,M$$CO$,M$$FI$,MN$FI$,MN$MM$,MN$RP$]