A month ago, China 5s10s curve inverted for the first time ever, flashing warning signs of an imminent recession (but technical, liquidity factors were offered as excuses for this shift in the belly of the curve). The curve then double-inverted (with 3s10s inverting) seemingly confirming fundamental fears. And now, China's yield curve is inverted from 1Y to 10Y for the second time in history.
China's $1.7 trillion government-bond market is turning curiouser and curiouser...
China's $1.7 trillion government-bond market is turning curiouser and curiouser...
The yield on China’s one-year government bond climbs 6 basis points to 3.66%, rising above the 10-year yield of 3.65%, ChinaBond data show.
This is only the second time that the yield curve has inverted in data going back to 2006, with the first coming during a record cash crunch in June 2013.
As The Wall Street Journal recently wrote, such a “yield-curve inversion” defies normal market logic that bonds requiring a longer commitment should compensate investors with a higher return. It usually reflects investor pessimism about a country’s long-term growth and inflation prospects.
Perplexed traders and analysts offered up many excuses...
“Many of us are scratching our heads for an explanation because this kind of curve inversion is absolutely not normal,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co., a bond fund that manages 2 billion yuan ($289.66 million) in assets.But of course, the reality is - without massive and continued credit creation, there are very large questions about just how 'dynamic' Chinese growth could be and while technical flows are certainly part of the reasoning for short-end yields rising, the question is, why wouldn't the rest of the world pile in to 'reach for yield'... unless the fundamentals really did have them worried?
“The inversion is a form of mispricing in the bond market,” said Liu Dongliang, senior analyst at China Merchants Bank . “The fact that no one is taking the bargain despite the higher yield on the five-year bond just shows how depressed investors’ mood is.”
“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,” said China Merchants Bank’s Mr. Liu.
The nature of the inversion (higher yields, higher funding costs, and leverage pressure) is starting to reflexively impact the real economy (and hence the chances of dramatically lower growth/recession), as The FT reports Chinese corporate bond financing hit a record low in May, as a market rout discouraged new issuance while a wave of previously issued notes came due.