Key indicators show that China is about to face another big problem

China’s bond market is the 2nd largest in the world and the market is expecting a huge sell-off. Bloomberg notes that 4 key indicators point to a sell-off in the making.

Bloomberg notes that 4 key indicators point to a sell-off in China’s bond market in the making

According to the report, Chinese bond buyers bought a lot of bonds in April, but now face the risk of a tightening in yield rates as the Li Keqiang Index, producer prices, bond demand and swap rates all point to higher bond yields.

The “Li Keqiang Index” refers to an economic indicator that refers to alternative data such as bank loans, electricity consumption, and railroad traffic, and the Li Keqiang Index has climbed to its highest level since 2010. The index is closely related to China’s 5-year non-deliverable swap rate, and based on the slow response of China’s bond market to economic indicators, the potential for a follow-on rise in colonial rates could be significant.

China’s producer prices, which are more closely related to the Chinese bond yield than consumer prices, are also strong, although the strength is partly due to a low base last year. But given the sharp rise in costs in China’s manufacturing sector, there is still room for acceleration. China will release new producer price data on May 11.

As for global demand, the latest data from ChinaBond showed foreign purchases of Chinese bonds slowed in March. With global funds shedding 16.5 billion yuan in bond holdings, the yield may rise to attract buyers. The spread between Chinese and U.S. 10-year bonds has narrowed to about 160 basis points from more than 250 basis points in November, with slower-than-expected inclusion of Chinese bonds in the FTSE Russell Global Bond Index one reason.

Finally in the short-term interest rate market, the current 3-month swap rate is around 2.31%, 12 basis points lower than the 3-month forward swap rate, suggesting that the market has prepared for an imminent reduction in liquidity and that this phenomenon is not yet reflected in the colonial curve.