China 'Rescues' Bond Market In Symbolic Move But Yield Curve Remains Inverted
For the 10th day in a row, China’s bond yield curve remains inverted (the longest in history).
With yields at 3-year highs, corporate bond issuance is evaporating, and has now emerged as the latest major, and most imminent, threat facing China’s financial sector and $10 trillion corporate debt market.
However, it appears Chinese authorities have reached their max pain point.
In a very symbolic move overnight, China’s Ministry of Finance bought 1.26 billion yuan of 1-year bonds for the first time in history via the secondary market. As Bloomberg reports,
The operation is part of a broader initiative to generate a reliable yield curve for risk-free government debt that can serve as a benchmark for borrowing costs across the economy.
While China has more than 22.9 trillion yuan ($3.4 trillion) of government securities outstanding — one of the world’s largest — it has less liquidity than many developed nations.
Under a system unveiled last November, China’s Ministry of Finance confers with market participants and, after any agreement that government bonds have insufficient or excess demand, issues additional securities or purchases existing ones from the secondary market.
While yields tumbled on the rescue attempt, the curve remains inverted…
As Christophe Barraud, Chief Economist & Strategist at Market Securities, explains, while the amount is not huge, it’s much more about the signal.
They really want to show that they are ready to buy bonds to contain short term yields, in line with recent injections of liquidity via OMOs.
Once again, in a year of political transition, they will do what is necessary to avoid any tensions.
So, despite the need to curb credit growth and the housing bubble, they should remain active on the money market.
In the meantime, public spending more precisely infrastructure spending will be a key tool to avoid a hard landing.
Finally, the reason why all of the above matters for not only the Chinese, but global, economy is because as we showed last week, China’s credit impulse is already crashing and has suffered its biggest drop since the financial crisis. As UBS calculated, “from peak to trough the deceleration in global credit growth is now approaching that during the global financial crisis (-6% of global GDP), even if the dispersion of the decline is much narrower.“
If one adds tens, if not hundreds of billions in Chinese corporate bond defaults to the China, and thus global credit drain next, the global credit impulse, and global deflationary tsunami, may surpass that observed during the financial crisis. And ironically, this “credit crunch” will come at a time when the Fed, unlike back in 2009 when Bernanke had just launched QE1, is hiking rates and preparing to do what it has never done before: reduce its balance sheet without crashing the market.