China’s Surprise Bond Reprieve Raises Fears of Crunch in May

Fears of a selloff in China’s sovereign bond market have proved wrong, with traders now bracing for the pressure to build through May, Bloomberg reported. Instead of surging higher this month, benchmark 10-year yields are comfortably below their half-year average and little changed from late March, thanks to a slowdown in debt issuance by municipal authorities. Traders had been bracing for a seasonal increase in local bonds at a time when China’s commercial banks — the biggest buyers in the market — typically funnel funds to clients to meet tax payments. Banks would then offload sovereign notes so they could snap up the riskier but more lucrative munis. That failed to happen in April, and there’s now concern of a bigger liquidity crunch next month. “The supply pressure will erupt eventually,” said Xing Zhaopeng, a senior China strategist at Australia & New Zealand Banking Group Ltd. in Shanghai. “Happening later than expected means there will be more buildup,” said Xing, who forecasts local government debt issuance and annual tax settlements will drain a combined 800 billion yuan ($124 billion) in May, resulting in liquidity falling 1.6 trillion yuan short of what will be needed. The reckoning didn’t come in April because local authorities are still drawing on leftover funds from previous debt sales, analysts say. And with the central bank limiting cash injections into the economy, taking some heat out of the stock market, investors bought into money-market funds, adding to liquidity in the system. The 10-year yield touched a near three-month low of 3.15% on April 21 and is set to end the month little changed around 3.18%. That compares with about 1.65% on Treasuries of the same maturity. Read more.

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