Chinese Gov’t Bond Yields Hit All-Time Lows as Potential Corporate Defaults Loom

Image of a traditional Chinese buildingFrom Tyler Durden: Investors are rushing to buy Chinese government bonds, which are now approaching all-time low yields amid a rash of potential corporate defaults.

The biggest (unspoken of) bubble in the world, just got bubblier. Following the lowest 10Y China government bond auction yield since records began in 2004, a surge of foreign inflows (seeking yield) combined with domestic flight-to-safety from the increasingly default-ridden corporate bond sector has sent China’s government bond yields to 2009 lows.

10Y Chinese government bonds offer a 120-140bps yield enhancement over Treasuries (and far more over JGBs or Bunds), which has sparked a surge of demand, sending the yield to near record lows in 2009…


And foreigners reach for yield has driven demand for Chinese government debt… (as Bloomberg notes)

The increased demand for sovereign debt was reflected at the government’s latest issuance of 10-year securities last week, which fetched a coupon of 2.74 percent, the lowest since at least 2004.



Overseas investors increased their holdings of onshore bonds in June by 47.7 billion yuan ($7.2 billion) to 764 billion yuan, latest available data from the People’s Bank of China show.

But there is another driver that is crushing government bond yields lower…

Chinese sovereign bonds have benefited from overseas inflows, which surged the most in two years in June, after the nation eased access to domestic markets.



Demand for the relative safety of government debt has been driven also by a rising number of company defaults,with a Chinese shipbuilder becoming the latest to renege this week. While recent data including that on factory deflation suggest the economy is stabilizing, gross domestic product is projected to expand at the slowest pace in more than two decades this year.



“Investors are more interested in government bonds as the slowing economy has reduced risk appetite and as default risks were exposed in the corporate debt market,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen.

And what has all this flight-to-safety and reach-for-yield created? The biggest – least spoken of – bubble in the world…


Of course local analysts see no problem…

“The bull market will continue for the rest of the year, as supporting factors will continue to exist and as the market may still expect the central bank to ease monetary policy to support growth.”

Thanks once again to the central planners saving the world, no matter what.

The iShares FTSE/Xinhua China 25 Index ETF (NYSE:FXI) was unchanged in premarket trading Wednesday at $36.48 per share. The largest ETF that holds a basket of Chinese equities has risen 3.37% year-to-date, but Chinese stocks could soon feel pressure from record bond demand and a rash of potential corporate defaults.


This article brought to you courtesy of ZeroHedge.

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