“China’s swap market turned cautious on the economy last month for the first time since August and global banks are divided on prospects for growth.
The extra cost of locking in interest rates for five years rather than two shrank to 36 basis points, from 46 on Jan. 31, according to data compiled by Bloomberg. The five-year swap that exchanges fixed payments for the floating seven-day repurchase rate fell seven basis points to 3.69 percent, while the two-year rose three basis points. Societe Generale SA and Bank of America Merrill Lynch said the so-called curve flattening will persist, while Deutsche Bank AG and Standard Chartered Plc forecast renewed steepening.
Confidence in the world’s second-biggest economy is being tested as a March 1 report showed manufacturing growth slowed in February, while an Italian election fanned concern Europe’s debt crisis will escalate and the U.S. government is reining in spending. China’s central bank auctioned repurchase agreements on Feb. 19 for the first time since June, withdrawing cash from the banking system to curb inflation. The gap between five- and two-year swap rates narrowed last month in the U.S. and Brazil.
“The latest manufacturing indicator was weaker and this could be the first shift in sentiment against the consensus calling for solid first-half growth,” said Wee-Khoon Chong, a rates strategist in Hong Kong at SocGen. “What’s happening inEurope helped a bit to dent optimism, and see what the U.S. sequestration will bring.”
