China bonds dragged down by coupon payments, stimulus concern

Local government sub-index suffers worst selloff since last year as glut of issuance expected this week despite expectations stimulus will be withdrawn

China bonds dragged down by coupon payments, stimulus concern
Infrastructure projects have been the target of a record amount of local government bond issuance.

(ATF) A returns-focused index of Chinese credit markets fell the most in a week after two issuers made coupon payments on their debts and amid a cloudy view on the future of China’s stimulus programme 

A sub-gauge of local government bonds fell the most in three months amid growing expectations that China will intensify the withdrawal of stimulus that has benefitted the coffers of regional authorities.

The benchmark ATF China Bond 50 Index of AAA rated Chinese corporate and local government bonds fell 0.05% to 106.78. It’s declined 0.12% since the resumption of trade after the Lunar New Year break, fuelled by concern that pent-up demand will be unleashed after the pandemic and spur an inflationary spiral. 

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Beijing Haidian District State-owned Capital Management Centre’s 3.17% bond maturing in March 2023 and Bank of Communications Financial Asset Investment’s 2.8% security due March 2025 paid coupons today and over the weekend. Bonds tend to decline after coupon obligations are met because that reduces the pool of interest the debt will pay out before maturity.

The Local Governments sub-index fell the most since December. Analysts are pricing in a withdrawal of Chinese stimulus as data consistently shows the economy is powering out of the slump brought about by the coronavirus downturn last year.

'Treading carefully'

“It is very clear that China’s policy makers intend to unwind stimulus and tighten policies,” Ding Shuang, chief economist for Greater China at Standard Chartered Bank, was quoted as telling the Wall Street Journal. “But they’ve been treading ahead carefully without making a sudden U-turn.”

The gauge was also undermined by concern that a glut of new issuance due to hit the market this week will meet with little interest.

China’s cities, counties and provinces are on track to issue about 241 billion yuan ($37.08bn) worth of bonds this week, according to a Reuters tally of issuance filings, compared with a total of 60 billion yuan for the month of February.

Such concentrated new supply of debt typically pushes yields higher.

“There are a lot of bearish factors this week, it’s just that there’s too much money in the market. Rates barely moved even with the big rebound in stocks. The social financing data was great and the market still didn’t move,” a trading source told Reuters. 

The Local Government sub-index is the best performer among the five ATF bonds gauges, having surged amid a record splurge of government issuance to fund local economic recovery programmes.

  • Additional reporting by Reuters

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