Deleveraging campaign wreaks havoc on China bonds
Government bonds continue to tumble as the yield curve for short- and long-term notes turns upside down
China’s 10-year government bonds dropped for a seventh-straight week, the longest run since the third quarter of 2013, reports Bloomberg. The 10-year yield reached its highest point in two years on Wednesday and closed at 3.65% on Friday.
This comes as the yield on 5-year debt for the first time exceeded the 10-year yield this week, reaching 3.71% on Thursday, as the Wall Street Journal reports. The “yield-curve inversion” of shorter-term yields exceeding longer-term tends to indicate pessimism about long-term growth and inflation prospects, but there are no signs this is the case here.
“Many of us are scratching our heads for an explanation because this kind of curve inversion is absolutely not normal,” the Wall Street Journal quoted Wang Ming of Shanghai Yaozhi Asset Management as saying.
The reason for the tanking bonds, and the inversion anomaly, can be found in Beijing’s crackdown on the shadow-banking sector, which has created lingering uncertainty as authorities continue to roll out new directives.
The initiatives have forced some issuers to sell bonds in their portfolios to pay off debts, but many have chosen to drop the less-liquid 5-year government bonds first.
Liu Dongliang of China Merchants Bank points out the lack of interest in the discounted 5-year bonds shows just how negative sentiment is amid the policy uncertainty.
“It’s really difficult to predict when the selloff or such anomalies will end because China’s bond market is reacting to the regulatory crackdown only and is no longer reflecting economic fundamentals,” Mr. Liu was quoted as saying.