Bond-trading probe launched

The central bank started an investigation into suspected price manipulation by bond trading companies, causing the biggest drop in 10-year debt in a year.

The central bank inspected firms on Tuesday after yields failed to keep pace with the monetary authority's 11 benchmark interest rate increases in the past two-and-a-half years, said Alan Chiu (邱明全), deputy director-general of the bank's examination department.

Policy makers are concerned prices have been "twisted," he said.

Bank Governor Perng Fai-nan (彭淮南) was seeking to push up market yields used as a benchmark for bank lending to curb inflation, after raising the benchmark discount rate on 10-day loans to 2.875 percent. A surplus of cash in the country's economy had pushed 10-year bond yields below 2 percent until earlier this month.

The central bank started the probe after "failing to drive yields higher by monetary moves," said Kevin Tseng, a Taipei-based bond trader at Yuanta Core Pacific Securities Co (元大京華證券).

The yield on the benchmark 1 7/8 percent bond maturing March 2017 climbed 6 basis points, or 0.06 percentage point, to 2.11 percent as of 1:33pm in Taipei, the GRETAI Securities Market said. It climbed to a five-month high of 2.12 percent. The price fell 0.5590, or NT$559 per NT$100,000 face amount, to 97.9366.

"Yesterday, we inspected several bond traders to see if any abnormal transactions occurred," Chiu said, confirming a report in the Chinese-language Commercial Times newspaper.

"Government bond yields failed to follow the central bank's policy in raising rates. We feel the yields have been twisted," Chiu said.

The benchmark interest rate of 2.875 percent was the second-lowest in the region after Japan's 0.5 percent, encouraging investors to borrow in the country to fund investment in higher-yielding assets overseas, known as carry trades.

Falling bond yields have also prompted Taiwanese life insurers to buy debt abroad.

"It's obvious regulators want to push up yields," said Arthur Hu, a Taipei-based bond trader at International Bills Finance Corp (國際票券). "A lot of people are groaning in pain because they're losing money."

Bond yields have lagged behind central bank rate increase as banks keep surplus funds in government securities due to a lack of investment opportunities, Hu said.

International Bills Finance received a letter from the central bank asking for details of bond trading and positions, Hu said.

Bond yields have climbed 13 basis points in the past two weeks as the central bank stepped up sales short-term securities, leaving investors with fewer funds to buy government debt. The central bank said on Monday that it would sell 364-day certificates of deposit by an auction early next month.