Treasury Bond Yield Bull Steepened while Credit Bond Default Pressure Remains

Bonds 5 minutes to read

Greater China Sales Traders

Summary:  In December, short term treasury yield led the whole curve lower amid monetary easing measures. The default amount in 2019 hit record urging bond market regulators to improve default handling.

China Bond Markets

Government Bond Market: Trend lower intact

In December, the benchmark government bond yield curve traded lower with bull steepening pattern. The 10 year traded in narrow range while short tenor 1 year yield dropped near 30bps. The yield drop in short tenor is mainly driven by series of PBOC’s easing measures to create ample liquidity condition.

Source: Saxo Bank, Bloomberg

Looking at chart below, the long term lower remain intact since 2017 which is in-line with fundamental economic development.

Source: Saxo Bank, Bloomberg

Credit Bond Market: Default pressure remains

The whole of 2019 saw missed payments on 156 notes onshore and 13 bonds offshore. Onshore company bond defaults reached 134 billion yuan in 2019 surpassing the 122 billion yuan in 2018. As defaults hit record, on Dec-25 PBOC published minutes of symposium on its website calling for more transparent and fair handling of defaults (

Liu Guoqiang, deputy Governor of PBOC stated that China has started to develop a market-based system for bond extension and trading of defaulted debts, as part of efforts to build a “multi-layer mechanism” to diversify approaches of handling repayment failures. Collaboration between different bond market regulators will be increased, with the next focus on improving bond market information disclosure rules.

The credit bond default is relevant to the broad social financing structure. The private sector’s debt net financing amount (excluding real estate) turned positive in December after staying in negative territory for five months since July. This is an important parameter to monitor as China‘s debt financing as capital resource has been structurally occupied by SOE and real estate companies, which is not healthy for overall economic structure.

Recently, PBOC pledged support for small firms by improving the incentive mechanism for lending to such companies. Hopefully, we will see this structural financing problem gradually solved.

Bond connect flash report

Content from BOND CONNECT:

Bond Connect rolled out the E-Filing System to facilitate online onboarding process and saw 32 applications in less than one month. List trading function went live, available at both Tradeweb and Bloomberg. Citibank became the first offshore user of the CSTP data interface service to track clients’ Bond Connect execution details on a real-time basis. Total number of onboarded institutional investors advanced above 1600.


Trading Statistics of Overseas Institutional Investors via Bond Connect

In terms of bond type, the top three most traded bonds are policy financial bonds (PFBs), treasuries and negotiable certificate of deposit (NCD). For tenor, near 50% is short dated ones below 3 year, 30% is long dated. In terms of trade size, over 50% is below 300 million yuan per trade with T+1 settlement cycle most preferred.

Source: China Bond Connect

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