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.
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.
Looking at chart below, the long term lower remain intact since 2017 which is in-line with fundamental economic development.
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 (http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3947639/index.html).
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.
Content from BOND CONNECT:
https://www.chinabondconnect.com/documents/FlashReportforBondConnect-2019-12.pdf
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.
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.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
