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MONEY MARKETS-More tightness seen in China; Asia dlr costs down

Published 07/17/2009, 03:37 AM
Updated 07/17/2009, 03:40 AM

HONG KONG, July 17 (Reuters) - The cost of borrowing dollars in Asia fell on Friday amid inreasing optimism that there would be no widespread impact from the troubles of U.S. commercial lender CIT Group, which is on the brink of bankruptcy.

In Singapore, the cost of 3-month dollars fell to 0.51143 percent, compared with Thursday's 0.51786 percent, edging closer to Monday's record lows of 0.50286.

It tracked the three-month London interbank offered rate on dollars which slipped to 0.5100 percent overnight after rising three straight days from its record low of 0.50500 percent last Friday.

Equivalent rates on euro and sterling extended their decline with the three-month rates setting fresh lows below 1.0 percent.

The spread between LIBOR and overnight-indexed swaps (OIS), the latter a measure of market expectation of policy rates, was also a shade narrower at 32.6 basis points, compared with Thursday's 34.5 percent.

In China, bond and bill yields rose and interest rate swaps jumped amid increasing signs of tight liquidity conditions.

In the latest development, the finance ministry only received subscriptions and sold 18.5 billion yuan ($2.7 billion) of 182-day bonds at a yield of 1.6011 percent, after offering 20 billion yuan of such bonds.

The one-year government bond yield rose sharply to a 7-month high of 1.3555 percent from 1.3245 percent and the weighted average 7-day repo rate climbed to a new 7-month high of 1.5512 percent from 1.5183 percent on Thursday.

Interest rate swaps remained volatile, and one-year yuan swap over the 7-day repo moving between 2.0 and 2.11 percent. That rate has risen over 50 bps since the end of June.

More tightness is expected over the next few months because of a lengthening IPO pipeline and after the central bank signalled at this week's open market operation that it was still continuing to mop up liquidity.

DBS Bank said in a report the challenge facing China will soon shift from growth to inflation.

"The sheer amount of new liquidity sloshing in the Chinese economy will in one way or another create inflationary pressure," it said while estimating lending could surpass 10 trillion yuan or 33 percent of gross domestic product in 2009.

"Eventually, China will have to implement an exit strategy to rein in the excessive liquidity," it said while anticipating more frequent verbal warnings from senior officials and the sale of more short-term bills to banks to mop up liquidity. (Reporting by Umesh Desai; Editing by Jan Dahinten)

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