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Category Archives: Bond

Charts: Foreign Central Banks Continue to Sell U.S. Treasuries

Japan and China Biggest Monthly Treasury Dump On Record

Source : Global Macro Monitor

Chart: German 10-year Yield Rose to Over a Decade High

Source : Bloomberg

Global Funds Cut China Bond Holdings for Eighth Straight Month

wrote . . . . . . . . .

Global investors sold China’s onshore bonds for the eighth straight month, the longest streak on record, as the notes’ appeal was dampened by a surge in Treasury yields and a weaker yuan.

Foreign investor holdings of Chinese bonds in the interbank market fell by about 70.7 billion yuan ($9.7 billion) in September following net sales of 35.4 billion yuan in the previous month, according to data from China Central & Depository Clearing Co. and Shanghai Clearing House.

China’s bond outflows intensified last month as the yuan fell to the weakest level since 2008, reducing the appeal of the nation’s assets for global investors. Surging treasury yields due to a hawkish Federal Reserve bets also dented the attractiveness of yuan-denominated debt as the People’s Bank of China maintained an accommodative stance to boost the economy.

Continued outflows amid the Fed’s aggressive tightening in September were expected, said Qi Gao, strategist at Scotiabank, adding that the market may need to be patient before global buyers return.

In September, foreign investors sold a net 35.8 billion yuan of Chinese government bonds and 20.8 billion yuan of the quasi-sovereign policy bank notes. They also sold 410 million yuan of local government bonds and 3.1 billion yuan of negotiable certificate of deposits, a popular short-term debt issued by banks.

Government bonds ended a streak of steady inflows that started in July that were partly driven by passive fund flows following the inclusion of Chinese bonds into the FTSE Russell’s World Government Bond Index.

Global investor holdings of Chinese bonds in the interbank market stood at 3.4 trillion yuan as of last month. Foreign ownership of government notes declined to 9.4% of the total outstanding volume at the end of September from 9.8% a month before.

Source : BNN Bloomberg

Charts: U.S. 3m-10Y Treasury Yield Spread Has Gone Negative

The preferred recession signal of the Federal Reserve Bank of New York

Source : Bloomberg and Fed

Chart: Australia 3-year Bonds Crashed After Central Bank Raised Interest Rate by Less-than-expected 2.5%

Source : Bloomberg

Chart: Chinese Junk Dollar Bonds Set for a Record-extending Seventh Straight Loss

Source : Bloomberg

Chart: U.S. Treasury 10-Year Yield Rises Above 4% to Highest Since 2020

Source : Bloomberg

Chart: China Yields on Onshore Junk Bonds Dropped Below Those of US Treasuries

The first time since 2007.

Source : Bloomberg

Defaulting China Developers Put Indebted Financing Vehicles Back in Vogue

Dorothy Ma and Wei Zhou wrote . . . . . . . . .

China’s local government financing vehicles are back in vogue with credit markets, as investors look for safety in the state sector amid record defaults by private developers.

The off-budget entities, which help cities and provinces raise funds for infrastructure spending, increased dollar bond sales between January and July by 46% to $27.7 billion, according to data compiled by research firm CreditSights. In contrast, total issuance in China’s dollar debt market fell 48%.

Amid the latest rise in LGFV popularity is some investors’ expectations for them to benefit from Beijing’s new infrastructure push and their possible role in cleaning up the mess left by defaulted builders. Others warn, however, that China’s housing slump is so severe that local authorities will be left with diminishing resources to shore up LGFVs’ already-strained finances.

“LGFVs are key to implementing China’s infrastructure stimulus this year and the local governments might need to rely on LGFVs” to finish failed developers’ housing projects, CreditSights analysts Zoey Zhou and Zerlina Zeng wrote in a note. That should keep government support strong for the sector, they said, though focus should return to cleaning up local government debt “once the economy regains momentum.”

LGFVs emerged as a key source of both growth and risk in China following the global financial crisis, when they started borrowing heavily to build regional economies. Beijing’s attitude toward them has swung back and forth over the years, imposing debt curbs during boom times and loosening its grip when growth falters.

Despite a lack of explicit backing from the state and a few brief payment scares in recent years, LGFVs have so far avoided delinquencies in public debt markets.

The sector is “a sweet spot to be in” as LGFVs provide a certain level of protection against default risks and market volatility, said Judy Kwok, head of Greater China fixed income research at Manulife Investment Management. The vehicles’ offshore dollar bonds have declined 0.4% this year, according to an iBoxx index, compared with a loss of about 35% in a Bloomberg gauge of Chinese junk dollar debt that predominately consists of developers.

But how long the optimism lasts is in question given there’s no end in sight to an unprecedented property crisis that has pummeled land sales, a major source of income for local authorities.

Meanwhile, it’s lower-quality LGFVs that have been dominating the sector’s dollar bond issuance given they’re discouraged from doing so onshore, according to the CreditSights analysts. They expect such LGFVs to continue selling the bulk of the sector’s dollar bonds the rest of this year while higher-quality entities keep tapping the onshore market, where funding costs have been trending lower.

“Local governments are walking a tightrope,” said Henry Loh, head of Asian credit at Abrdn Plc. “Their willingness to support LGFVs is intact, but their ability to help is a growing question.”

Source : BNN Bloomberg

Chinese Corporate Dollar Debt Issuance Falls at Record Pace

Lorretta Chen wrote . . . . . . . . .

Chinese companies are curbing their dollar borrowings at a record pace this year, stung by a property debt crisis on top of rising rates that have dragged down corporate financing in the currency nearly everywhere.

The amount of dollar bonds issued and loans taken out by Chinese corporates has slumped 46% to $101 billion, the largest decline for similar periods of previous years in data compiled by Bloomberg. That compares with a 25% drop so far in 2022 among firms in the Asia Pacific region excluding China and a 30% decline in issuance of US currency notes by all companies globally.

The slide in issuance from Chinese borrowers is in line with global trends, with firms from Beijing to Sao Paulo increasingly avoiding dollar-debt markets given surging interest rates and dollar strength, as the Federal Reserve ramps up its fight against inflation. But the shift by Chinese companies toward the nation’s local debt market stands out. Rate cuts by its central bank have helped send local financing costs to record lows while monetary authorities elsewhere in the world have tightened recently.

It’s now cheaper to borrow in yuan than it is in dollars, so even export-oriented companies that earn revenue in dollars have been switching to yuan financing at the margin, said Adam Wolfe, emerging markets economist at Absolute Strategy Research Ltd.

The Fed’s tightening cycle has weighed on global dollar debt sales as interest rates have spiked, sending notes to their first global bear market in a generation. The European Central Bank just made its biggest-ever rate hike, ahead of the Fed’s upcoming meeting.

Global dollar-bond issuance jumped last week, with Japanese companies driving such activity in APAC, as borrowers raced to get ahead of potentially still-higher costs. But Chinese firms, which make up 38% of this year’s dollar-note issuance in this region, have sold around 10% of this month’s total.

Instead, mainland borrowers are increasingly looking closer to home as China’s monetary policy diverges from other nations. Yuan-denominated bond issuance has overtaken global dollar-note sales in recent months amid some of the cheapest-ever funding costs domestically. Authorities including the People’s Bank of China have been stepping up efforts to support a lackluster economy hurt by the Covid-Zero policy and a worsening housing crisis.

“We don’t expect any reversal of the trend in short term as the divergence in PBOC and Fed policy is set to continue,” according to Owen Gallimore, head of APAC credit analysis at Deutsche Bank AG. Because of falling bond issuance, he predicts investment-grade Chinese dollar notes will outperform for 2022.

Chinese firms have also been opting to sell bonds in the offshore yuan. Issuance so far this year of so-called Dim Sum notes has surged 59% to $25 billion, the most since 2014, according to Bloomberg-compiled data.

Developers had been among China’s biggest dollar-bond issuers. But that channel has largely been cut off to the sector in light of record defaults as home sales have fallen for more than a year and the government clamped down on property-related debt growth. In a bid to increase oversight of foreign debt risks, Beijing has proposed requiring Chinese borrowers to register, report and receive approval for sales of offshore notes with tenors exceeding one year.

Source : BNN Bloomberg