China Halts Trading in Key Bond Futures as Panicky Investors Sell Securities
Slowing growth, capital outflows fuel concerns that bull market is coming to an end
Trading in bond futures resumed after the government injected funds into the short-term money market. PHOTO: WU HONG/EUROPEAN PRESSPHOTO AGENCY
Updated Dec. 15, 2016 7:05 p.m. ET
SHANGHAI—Chinese bond yields soared and authorities halted trading in some futures contracts for the first time on Thursday, as a global bond-market selloff worsened a day after the Federal Reserve signaled a quicker pace of interest-rate increases next year.
The Chinese 10-year government bond yield, which rises when prices fall, hit a 16-month high of 3.4%, extending selling that began in late November and accelerated this week amid slowing growth, outflows of capital and concerns over asset bubbles.
In early trading, the 10-year and five-year government-bond futures recorded their biggest ever drops in price, falling by 2% and 1.2%, respectively, leading exchange authorities to suspend the securities.
Trading resumed only after China’s central bank injected about $22 billion into the short-term money market.
Later in the global day, the selling sent the yield on the 10-year U.S. Treasury note to 2.639%, before settling at 2.580%, compared with 2.523% the day before. It marks the yield’s highest close since September 2014.
 ENLARGE
The Fed raised its benchmark policy rate by a quarter of a percentage point on Wednesday, as investors had expected. But the central bank also forecast three more rate increases in 2017, a surprise for investors.
“The market was not expecting a change,” said Mike Amey, a portfolio manager at Pacific Investment Management Co. “You can see that in the reaction in the market.”
Prices of short-dated bonds, which are particularly sensitive to changes in monetary policy, also weakened. The yield on the two-year Treasury note rose 0.023 percentage point to 1.261%.
In Europe, the yield on 10-year German government bonds rose 0.062 percentage point, to 0.363%, while the yield on equivalent Australian debt jumped almost 0.2 percentage point, to 2.903%.
U.K. government bonds were among the hardest hit. The yield on the 10-year note declined slightly after the Bank of England said it would keep interest rates and its bond-buying program steady Thursday, but remained up 0.1 percentage point, at 1.352%.
 ENLARGE
Trading in key bond futures resumed Thursday only after China’s central bank injected around $22 billion into the short-term money market.PHOTO: REUTERS
During the summer, bond prices rallied, sending yields to record lows following the U.K.’s vote to leave the European Union. Investors piled into government bonds, especially long-term debt, as they expected a prolonged period of soft global growth, low inflation and ultraloose monetary stimulus from major central banks in Japan and Europe.
But global data over the past few months have shown an improved economic outlook and a slight rise in inflation pressure, causing investors to lighten up on bonds. That narrative has been gaining traction since the U.S. election on Nov. 8, as expectations have been increasing that expansive fiscal policy, lower taxes and lighter regulation proposed by U.S. President-elect Donald Trump would lead to stronger growth and higher inflation.
Between Election Day and this past Wednesday, the global bond selloff has wiped out $1.45 trillion in market value from the Bloomberg Barclays Global Treasury index, which tracks government bonds in both developed and developing countries.
Chinese investors appear to think the Fed’s move increases the chance China will guide its own rates higher to stem the yuan’s recent decline against the dollar and heavy capital outflows from the country.
But the bond-market slump also exacerbates the policy dilemma facing China’s central bank. The People’s Bank of China has tightened short-term lending in recent weeks in an effort to make it harder for speculative investors to borrow money. The problem is that such tightening moves—along with any future rate increases—could provoke market plunges and panics as liquidity dries up.
“The Chinese bond bull market is over, as we have seen a turning point in money-market rates this year,” said Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management Co., which has $6 billion under management, referring to a tightening of liquidity in China that began this autumn and has recently gathered pace.
China has unleashed a wave of easy credit and fiscal stimulus in recent years to keep its slowing economy afloat. Chinese investors were able to benefit by borrowing cheap money and pouring it into assets from bonds to housing to commodities, producing what some economists have described as a series of unsustainable bubbles.
Some of these bubbles have burst over the past 18 months, with the crash in China’s stock market in the summer of 2015 the most notable example.t, Now the pain has spread to the $9 trillion bond market which remains overwhelmingly driven by domestic investors, despite some opening up to foreigners this year. The yield on 10-year government bonds had dropped as low as 2.6% in August.
“People woke up to the fact that the bond bubble is too large,” said Hao Hong, co-head of research at BoCom International, which is owned by Hong Kong’s Bank of Communications. “The bond market in China is under severe pressure, across the board.”
Underscoring the skittish feeling among investors, Thursday’s selling pressure was also driven by rumors spreading through the markets. A midsize Chinese brokerage denied a report in a major Chinese newspaper that it had defaulted on a large bond payment. One of the country’s biggest fund managers, meanwhile, denied a rumor circulating on cellphone chat groups that it was facing large redemptions.
Analysts said such rumors carried weight because many fund managers are heavily in debt, making them vulnerable to declining bond prices.
“The market is very sensitive to rumors now,” said Ke Congwei, a fixed-income analyst at Guosen Securities, based in Shenzhen.
The bond selloff adds to broader concerns about the Chinese economy, which likely expanded at its slowest pace in more than 25 years in 2016, weighed down by an increasing debt load and money-losing state-owned industries.
China is also grappling with large-scale capital outflows. The country has lost about $1.2 trillion of its foreign reserves, or around a quarter of its total, in the past two years as billionaires and average citizens transfer savings to the safety of overseas markets.
To stem the outflows, authorities are using measures such as restricting overseas company acquisitions, transactions that could be fronts for spiriting money out of the country.
—Yifan Xie, John Lyons and Min Zeng
http://www.wsj.com/articles/china-halts-trading-in-key-bond-as-panicky-investors-sell-securities-1481803121
|
