China deleveraging campaign threatens municipal bonds
Premium demanded by investors for local bonds has reached record levels
A campaign to reign in risk in China’s financial system has led to a reassessment of the country’s bond markets, pushing premiums for municipal bonds to record levels, reports Bloomberg.
The shift to risk-based pricing of the municipal debt comes as local governments with poor credit are under pressure to convert borrowing into bonds, with local debt sales set to reach an all-time high this year.
Senior analyst at Moody’s Investors Service in Shanghai Amanda Du explains that “the credit premiums may widen further on tightening liquidity as a result of the central bank’s monetary policy fine-tuning and the regulatory enhancement.” She added that municipal bonds not only suffer from having lower yields than corporate debt, but their liquidity is also not as attractive as sovereign securities.