Chinese launches its first variable rate bond based on the key benchmark “DR

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  • The Chinese central bank issued its first variable rate bond called “DR”.
    The aim is to improve China’s benchmark interest rate system and enhance monetary policy transmission
    In mid-November, the 10-year yield in China reached 3.35%, the highest level since May 2019.

    The Chinese central bank issued its first variable-rate bond called “DR” to strengthen the pricing mechanism for the financial markets.

    Basic analysis: new product launched

    After the expiration of the London Interbank Offered Rate (Libor), China decided to reform its key interest rate framework, joining other world leaders.

     

     

     

    China’s central bank stated that the Depository-Institutions Repo Rate (DR) is an important reference for changes in monetary policy and market pricing.

    The Export-Import Bank of China auctioned a 3 billion yuan (USD 458.94 million) floating rate bond linked to the DR’s seven-day repo rate. According to traders, the interest rate of the six-month bond was estimated at 2.6%, 44 basis points higher than the benchmark.

    According to analysts, products such as these should strengthen China’s benchmark interest rate system and improve the monetary policy transmission.

    In addition, floating rate bonds are likely to help investors and issuers avoid volatility induced risks. However, these instruments account for only 1% of the Chinese bond market, as the majority uses Shibor as a benchmark.

    Shibor is calculated based on the banks’ quotes, while DR is based on daily repo trading at an average of 1.8 trillion yuan and is the most common “barometer” of liquidity in the country’s banking system, according to the central bank a few months ago.

    Technical analysis: 10-year rate up

    The 10-year yield in China has been on a continuous upward trend since April. Last month the price action reached 3.35%, the highest level since May 2019.

    China 10-year yield daily chart (TradingView)

    A movement above 3.15% also made it easier to break through the descending trend line connecting the lower highs. As can be seen from the chart above, the price action hit the 200-WMA, which now acts as a resistance.

    Summary

    As part of the central bank’s efforts to improve the pricing mechanism for the financial markets, China introduced its first floating interest rate based on a key benchmark called “DR”.

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