There’s “big trouble in little China.” Actually, that’s not true. I don’t think this qualifies as “big” trouble yet, but it’s definitely worth keeping an eye on.
On Sunday night, we noted that 10Y yields in China were closing in on 4%:
China 10Y yield closing in on 4%… highest since October 2014
— Walter White (@heisenbergrpt) November 13, 2017
Well on Tuesday, they got there – and then some:
Panning out a bit, you can see where we are relative to the past few years:
A couple of things here. First, there’s palpable angst concerning what’s going to happen with this in the context of Beijing’s deleveraging campaign. If liquidity remains tight and pressure to deleverage grows, well then that’s going to press yields higher.
The longer this goes on, the higher the chance it spills over into corporate bonds and once that happens it will hit the real economy. The more upbeat the inflation data, the more upward pressure on yields there’s going to be.
So there’s a kind of damned if they do, damned if they don’t dynamic going on here and underscoring that is the fact that weaker-than-expected industrial output and retail sales data overnight didn’t help bonds.
“We are bearish. That’s because investors have grown increasingly concerned with tighter financial deleveraging and they hold the belief that there’s no room for any easing,” Becky Liu, head of China macro strategy at Standard Chartered told Bloomberg Tuesday.
In any event, this is something to watch, because just about every factor one cares to catalogue points to the bond selloff accelerating and given the dynamics at play in China, that could start tipping dominos.