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- 16 Dec 2020
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China bonds set for worst week in 7 years
China's sovereign bonds headed for the biggest weekly decline in more than seven years, reeling from the fallout of hawkish Federal Reserve comments, yuan depreciation pressures and waning liquidity.
Yields on 10-year sovereign bonds have surged 30 bps so far this week, the most since January 2009, to 3.4 pc. The one-year yield jumped 50bps, while the five-year rose 27bps. The yuan, which fell to an eight-year low, is heading for the biggest weekly decline in a month.
The US Fed's indications of quicker tightening fueled fears of faster fund outflows and ignited a record one-day yield jump Thursday, while Chinese bonds have been under pressure in recent weeks from a government-driven effort to reduce leverage.
Chinese policymakers have now shifted focus in the second half of this year to reducing financial risks as economic growth stabilised, with PBOC Deputy Governor Yi Gang saying in early September the nation's short-term goal is to lower leverage ratio growth.
By steering money-market rates higher, the PBOC has forced a correction in the highly leveraged bond market, while home prices are showing signs of cooling amid property curbs.
While the PBOC has been using new lending tools and open-market operations to replenish liquidity, they haven't been enough to offset persistent cash outflows.
In the eight months to November, the outstanding balance in the monetary authority's medium-term lending facility increased by 1.4 trillion yuan ($202bn), while the PBOC's yuan positions, a gauge of capital flows, dropped by 1.6 trillion yuan.
The nation's foreign-exchange reserves fell by $69.1bn in November, the most since January.
With the dollar still on an impressive run, Asian bourses experienced another mixed session.
With the dollar reaching a 14 year high yesterday, Japan's Nikkei exporters posted further gains as the yen retreated.
In news likely to unsettle the FTSE, Japan's financial institutions based in London have warned that without further clarity on Brexit, they could begin the process of extracting themselves from the UK within six months.
The dollar held above 118 yen, at a 10-month high, while it also pushed on against other regional currencies. The Australian dollar fell 0.4pc, South Korea's won dropped 0.5 percent and Indonesia's rupiah was off 0.2pc.
Australia's ASX posted small losses, although a brief recovery in haven assets helped offset the poor performance of industrial metals and oil.
In the commodities markets, Crude oil prices have marginally gained, although they remain in a technical downtrend.
While markets were buoyed on Monday by the news that Opec and non-cartel producers had agreed to production cuts, the IEA's report on Tuesday - which showed that production has considerably overshot targets - quickly reversed price increases.
Also weighing in on the decline is the recovery of US shale, with tonight's Baker Hughes US rig count expected to herald more bad news for Opec.
