Coupon payout drags down inflation-worried bonds

Transit group’s debt payment weighs on ATF indexes already reeling under economic overheating concerns 

Coupon payout drags down inflation-worried bonds

(ATF) A coupon payout on a bond of Chengdu China Transit Group dragged down returns on a key gauge of Chinese credits Monday.

The company’s 4.24% bond due in March 2024 pulled down the benchmark ATF China Bond 50 Index and the Corporates sub-index. The main measure also fell on continuing concern that an inflationary spiral is looming over the global economy.

The ATF CB50 fell 0.05% to 106.78. It’s lost 0.13% since the resumption of trade after the Lunar New Year break in the middle of February. Concern that a global recovery from the pandemic-spurred global downturn will inflate prices has weighed on risk markets and safer fixed-income assets alike.

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Bondholders tend to unwind their bets at the prospect of inflation because rising prices erode the value of fixed payments on bonds. Similarly, coupon payouts reduce bonds’ appeal by lowering the pool of cash that will be paid during the remaining lifetime of the security.

A gauge of local government debt climbed the most in a week as the government prepared to rollout the biggest sale of municipal bonds in six months. Bloomberg estimates that 193 billion yuan of notes will be issued this week, mostly to refinance existing debt.

Demand for local government bonds in China has made the sub-gauge the richest among the five bond indexes compiled by ATF. The measure reached 117.83, widening its spread with the broader gauge to more than 11 points.

Provincial, city and county authorities were given broader powers to issue a record amount of debt last year to fend off the pandemic downturn. The central government has focused on propping up local economies and jobs even as the pandemic hammered the wider economy in the first quarter of 2020.

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