* Sharp paying in forward swaps pressure rates higher
* Markets pricing in about 75 bps of hikes over 12 months
* 7-day repo rate rebounds sharply
By Saikat Chatterjee
HONG KONG, Nov 22 (Reuters) - China swap rates rose to a two year high on Monday after the central bank on Friday increased banks' reserve requirements for the second time in as many weeks, reflecting views a rate hike may still be in the offing.
Beijing's actions to check inflation have been gaining pace and swap traders interpreted climbing reserve requirements to mean a lending rate increase is not too far ahead.
One year forward starting swaps -- a rough gauge for calculating forward interest rate expectations by subtracting them from one year swaps -- indicate markets reflect 75 bps of rate hikes over the coming year.
Forward swaps, especially in the one year tenor, are up by 90 bps this month alone -- far outpacing the rise in outright swaps -- mainly due to aggressive paying from offshore hedge funds who are positioning themselves for higher interest rates, a rates strategist at a Singapore-based European Bank said.
Speculative players prefer the forward swaps market because these contracts do not require cash upfront since bets only start at a future date, the strategist said.
The heavy paying in forward swaps has spilled over into
the offshore swaps market with one year rates
One year swaps extended a five-week run of gains on Monday, climbing to 2.90 percent -- the highest level since October 2008 and up 15 basis points from Friday.
"The jump in China swap rates may well prove more lasting as it appears increasingly clear that the country's policy makers are shifting policy emphasis from growth to inflation," Credit Agricole CIB analysts said.
Real interest rates - the difference between nominal rates and inflation -- are negative by nearly 200 basis points despite a 25 basis point increase in deposit and lending rates last month, and there are no signs that inflation is letting up.
Headline consumer inflation is running at a 25-month high in October, indicating a need to increase policy rates further.
China lifted reserve requirements for big banks to 18.5 percent of total deposits -- a record -- aggravating fears that cash surpluses in the money market would drop sharply.
The benchmark seven-day government bond repurchase rate , a barometer for money market cash, has risen by more than 40 bps in the past two weeks to a six-week high of 2.09 percent.
In New Zealand, bond yields spiked after Standard & Poor's revised the country's foreign currency rating outlook to negative from stable, but short-dated swaps fell as traders believed that rising bond yields would forestall the need for the central bank to tighten policy. [ID:nSGE6AL05L]
Two-year swap rates fell by 3 bps to 3.96 percent, deepening a fall from earlier this month, indicating expectations for policy tightening have been steadily scaled back this month in the backdrop of economic uncertainty.
Analysts said the yield curve may steepen in the coming months as investors price in a less-hawkish stance on rates while the longer end is seen up due to the increased perceived risk premium resulting from the higher possibility of a downgrade.
Yields should rise more as offshore investors own 60 percent of outstanding debt and ten year swap rates should too rise to some extent, reflecting a higher risk premium, Imre Speizer, a strategist at Westpac Global Markets in Wellington said.
(Editing by Kevin Plumberg)