bonds in China are Asia's worst performers for the second time

bonds in China are Asia's worst performers for the second time in four years, reflecting the concern of the central bank will have to be more aggressive in interest rates as it tries to control inflation.

local currency bonds government gave investors a return of 1.7 percent this year, the smallest among HSBC Holdings Plc, tracking rates of 10 largest economies in Asia, excluding Japan. Notes in Indonesia, where borrowing costs have remained at a record, led the regional gains for a second consecutive year in 2010, with an increase of 19 percent.

The People's Bank of China has stayed out of the addition of October to raise interest rates, the first since 2007, reflecting further increases may stimulate capital flows that feed inflation, Wu Xiaoling, a former lieutenant governor, said on 11 December. Consumer prices rose 5.1 percent from a year earlier, in November, the most in 28 months, and the national planning agency said last week up the prices on an "urgent" need to be stabilized to safeguard the people's living standards.

"Rising inflation and robust economic growth important and may lead the central bank to raise interest rates five to six times next year," said Guo Caomin, bond analyst at Industrial Bank Co. in Shanghai. "We are very pessimistic about the bond market next year."

The prognosis of government bond yields on benchmark 10-year above 4.5 percent in 2011, compared to yesterday's closing level of 3.83 percent. The index rose 50 basis points, or 0.50 percentage point since September, turned to its biggest quarterly profit since June 2007. Fell one basis point yesterday.

Bonds, swaps

China's central bank will raise interest rates by one percentage point over the next 12 months and the 10-year yield will rise as high as 4.75 percent, according to Société Générale SA, the second largest bank in France. DBS Group Holdings Ltd., the largest bank in Southeast Asia, predicts 1.25 percentage points of rate increases and a similar increase in yields.

The interest rate swap one year, the fixed cost required to receive the floating rate repurchase seven days, has gained 91 basis points to 3.10 percent this quarter. The yield on the benchmark of two years has increased 105 basis points to 3.16 percent, the highest since 2008.

"Bonds have been swept up by inflation concerns, and talk of rising interest rates," said Robert Reilly, co-head of Asia fixed income at Societe Generale SA in Hong Kong. "The interest rate level is very low, so the only way for them is going up."

Outlook Prices

China's central bank raised its benchmark interest a year and deposit rates on 19 October by a quarter percentage point to 5.56 percent and 2.5 percent. Is likely to be boosted by about 2 percentage points in 2011, said Dong Tao, chief economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong.

Citic Securities Co., China's largest listed brokerage, predicted two to three increases in borrowing costs over the next six months will be enough to curb increases in consumer prices, helping to support bonds.

"Not necessarily going to be another year of a bond market in 2011, although yields will rise in the first half," said Hu Hangyu, a debt analyst at CITIC Securities in Beijing. The 10-year yield will reach 4.2 percent in late June, before declining to 3.8 percent in the second half, he predicted.

Loan growth

Credit growth in the last two years has played a role in deterring Chinese policy makers to raise rates too quickly, according to DBS. Outstanding loans in local currency increased 60 percent in that time for a record total of 47.4 trillion yuan (7.1 billion) at the end of last month, central bank figures show.

Instead of raising borrowing costs, China has focused in recent months about the restriction on loans to help quell inflation. sixth increase this year of the required reserve ratios to senior lenders entered into force on 20 December.

The central bank sold 1 billion yuan in bills a year, with a yield of 2.3437 percent at auction yesterday, holding the rate unchanged for a sixth week, according to a statement on the website monetary authority. The government plans to sell 20 billion yuan of debt for three months on 24 December.

Bank of East Asia Ltd. said on December 20th his unit in China obtained the approval to issue up to 5 billion yuan ($ 751 million) of bonds in local currency in the interbank market in the country. The lender in Hong Kong is the first bank incorporated in the foreign country in China to get approval to issue yuan-denominated bonds, Chief Executive David Li, said in an emailed statement.

Yuan rises

The yuan strengthened 0.09 percent to 6.6531 per dollar as of 12:31 pm in Shanghai, contributing to an increase of 2.6 percent from a fixed exchange rate ended in June. Delivery period indicate the currency will gain 2.1 percent in the next 12 months.

credit-default swaps on five-year Chinese government bond fell 2 basis points to 69 hours, according to CMA prices in New York. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to debt agreements.

The interest rate of seven days, which measures the cost of loans between banks, gained 10 basis points to 4.17 percent today, the highest level since June 2008, according to a daily fixing published by the National Interbank financing the Centre in Shanghai.

"This year has been mainly on the management of liquidity requirements and hiking reserve, but interest rates have not moved much, we'll see more interest rate increases next year," said Jens Lauschke strategist fixed income at DBS in Singapore, in an interview. "For government bonds, which means that the downtrend is likely to continue in the coming months."