The abrupt reversal of foreign inflows to China’s bond market is a deeply concerning development, and warrants closest of scrutiny, writes Grant Wilson.
It has been a torrid month for global bond markets, with the repricing of yields taking on historic dimensions. Yet the most significant development from a cross-border perspective has received scant attention.
At the same time there have been some vocal advocates of Chinese government bonds, most notably Bridgewater Associates, An alternative benign explanation is that the nominal yield advantage offered by Chinese government bonds has been eroded by the rapid repricing of G10 markets, thereby encouraging disinvestment. For context, the 5-year US Treasury yield has risen by a full percentage point in March, closing on Friday at 2.55 per cent. Comparable moves have been witnessed elsewhere, including here in Australia. The one outlier is China, where yields have tracked sideways through March.
This hot take has not been borne out by high frequency capital flow data, including foreign exchange intervention statistics from the PBOC. Moreover, the financial sanctions and response from SWIFT have been routinely misinterpreted in terms of their breadth. The measures were consciously designed so that financial flows could still take place,, and coupon payments on bond maturities. The prospect of a Russian default, whether it be on sovereign or corporate bonds, is still very much in play.