(Bloomberg) -- China’s money markets are betting the authorities will delay their anticipated monetary easing measures in order to support the beleaguered yuan.
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The country’s five-year interest-rate swaps, a popular hedging tool, dropped below their one-year counterparts last month for the first time since September. The discount deepened to the most in almost a decade last week, according to data compiled by Bloomberg.
The inversion of the swap curve took place as traders wound back expectations for the authorities to cut interest rates or lower the reserve-requirement ratio for banks. That drove them to sell one-year swaps and buy the five-year equivalents to position for a later date for monetary easing.
Concern over delayed easing can also be seen in the sovereign bond market, with the yield on one-year debt poised for the largest weekly increase since late 2023.
“The inversion of the interest-rate-swap curve largely reflects a delay in the much expected policy rate or RRR cut, due to China’s intention to hold the currency before US officials announces higher tariffs,” said Ju Wang, head of greater China foreign-exchange and rates strategy at BNP Paribas in Hong Kong. “It also reflects the PBOC’s contradictory policy goals of trying to limit currency losses amid monetary easing.”
The yuan has tumbled about 3.5% against the dollar in the past three months as the US currency has rallied and China’s sluggish economy has seen the nation’s bond yield discount to Treasuries widen. Concern has also grown over the impact of the higher US tariffs threatened by US President-elect Donald Trump.
The PBOC stepped up support for the yuan this month by announcing issuance of a record amount of bills in Hong Kong to soak up offshore liquidity. The central bank has also kept a relatively tight grip on the currency through its daily reference rate, which caps any movement in the yuan to a range of 2% on either side.
It also halted government bond purchases, a move that’s seen aiding the currency. Australia & New Zealand Banking Group Ltd. says the bond buying halt is in line with its view that expectations of loose monetary policy may not materialize due to the depreciation pressure on the yuan.
A PBOC-backed newspaper cited an economist saying the market should not excessively interpret the scope of monetary easing and should avoid placing aggressive bets. China’s one-year yield has risen over 15 basis points this week to 1.17%, while the 10-year rate has rebounded off a record low.