China's $1.7 trillion government-bond market is turning curiouser and curiouser...
In a fresh sign of the nerves among investors caused by Beijing's campaign this spring to make Chinese markets less risky, the yield on seven-year government bonds rose to 3.79% on Monday, above the yield on both five-year and 10-year bonds.
The highly unusual move means that China's government-bond yield curve now resembles a triangle, with the seven-year yield at its highest since October 2014. Furthermore, the Chinese curve has a double-inversion 3s to 5s and 7s to 10.
In fact the 3s10s spread is the most negative ever...
The shift comes less than two weeks after the government-bond yield curve became inverted for the first time on record, with 10-year yields--now at 3.65%--lower than those for five-year bonds, currently at 3.68%. Normally investors demand higher yields on bonds that have longer to go until maturity.
Intriguingly, 30Y US Treasuries and 3Y China Treasuries have traded very tightly coupled at the same level for 6 years...
"We are seeing a butterfly on our screen that we have never seen before, " said a Shanghai-based senior bond trader at a local mutual fund.
The continued pressure on Chinese bonds (and stocks) is driven by both technical flows (China's ongoing crackdown on leverage in the financial system spewing out into the shadow banking system and hitting retail), and expectations for growth in a lower credit growth world (which has crushed the yield curve).
Just last night brokerage shares slumped as Chinese authorities blocked off-'channel' operations, barring securities firms from helping banks take loans off balance sheets...
As The Nikkei Asian Review reported, Chinese authorities have begun cracking down on brokerages engaged in the profitable business of helping banks keep inconvenient loans or assets off the books, sparking a broad slide among Shanghai-listed securities firms Monday.
The China Securities Regulatory Commission on Friday banned so-called channel business helping banks convert on-the-books loans and notes into off-balance-sheet financial instruments, announcing the audit of an investment fund facilitating such transactions. The activities enable lenders to circumvent caps on loan-deposit ratios, for example.
Channel business is a significant source of fee revenue for brokerages but amounts to a firm abandoning its responsibility as an asset manager, the securities commission said.
The resulting murky wealth management products form a cornerstone of China's shadow banking system, offering investors high returns in exchange for significant risk. The country's banks handle some 29 trillion yuan ($4.21 trillion) in such products. Regulators fearing such risk factors as defaults have stepped up a crackdown on shadow banking since April.