Stand easy — or easier, at least. Ten basis points might not be the biggest one-day change for borrowing costs in China’s vast $7tn bond markets, but it was enough on Monday to push the country’s closely watched onshore repo rate back from an eight-month high. That offers a little breathing space for investors to ponder what next for the rising tensions in onshore bond markets. One point to look at is their own leverage as well as their fears for companies.
Bond yields in China have jumped. This month, China’s five-year government bond yields have risen 25 basis points to 2.75 per cent — their worst monthly performance in a year. Defaults by two state-owned groups have raised fears that others could follow suit. All this has added roughly half a percentage point this month alone for high-quality borrowers onshore. Spooked by this, companies have so far suspended plans for an estimated $10bn in expected bond issuance.
Amid all the furore about the pain of rising rates, one so-far overlooked factor is that investors, as well as companies, appear precariously balanced. The market for pledge-style repos — short-term, bond-backed loans — is currently bigger than the stock of outstanding debt, according to Wind Info. A sharp worsening in market sentiment could force those borrowers into fire sales if their loans are called or cannot be rolled over. And the bond fund inflows that followed last summer’s stock market rout are also at risk of reversing. Since China’s bond markets are not as liquid as their size suggests, fund managers facing redemptions could be forced to dump what they can, not what they should.