IMF optimism brings risk back into credit markets

Broadest gauge climbs for a third day; SOE bonds snap two-day drop after IMF praises Covid response 

IMF optimism brings risk back into credit markets

(ATF) Chinese corporate and local government bonds climbed for a third consecutive day Wednesday as investors piled into riskier debt following the International Monetary Fund’s (IMF) upgrade of its estimate for global growth.

A gauge of state-owned enterprise (SOEs) bonds snapped a two-day slide after the IMF also praised China’s efforts to spur regional recovery programmes through bond sales, but urged a slowdown of issuance to prevent a build up of financial risks.

The returns-focused ATF China Bond 50 Index of AAA rated credits climbed 0.02% to 106.68. The measure is gaining ground this month after losing 0.32% in March.

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Declines were exacerbated by outflows of foreign investment in Chinese sovereign bonds as narrowing spreads over overseas debt and a weaker yuan tarnished their appeal. That was the first monthly reduction of overseas capital into the market in two years, according to data released Wednesday by interbank market depository China Central Depository & Clearing Co (CCDC).

The ATFCB50 also fell in March as a raft of issuers made coupon payments on their bonds. Bond prices tend to fall when coupon obligations are met because they reduce the fixed pool of interest that will be paid on the securities over the rest of their lifetime.

The IMF opened its annual spring meeting on Tuesday with an upgrade in its forecast for 2021 global growth to 6% from a previous prediction of 5.5%. China and India are expected to see the biggest rebound from the effects of the Covid pandemic in 2020, with growth of 8.4% and 12.5%, respectively.

The institution praised China’s speedy response to the Covid crisis but said the cost had been high and it urged the government to slow bonds issuance.

“China, of course, has re-emerged from the crisis more quickly than any other country. The measures that were taken were very quick and very effective,” Tobias Adrian, financial counsellor at the IMF, was cited as saying in the South China Morning Post. “But the measures that were deployed have led to [a] further increase in leverage and vulnerabilities.” 

SOEs were the beneficiaries of trillions of yuan of extraordinary bond-sale proceeds funnelled throughout the country to stimulate local economies out of the coronavirus downturn. But concern that they had become overburdened with debt – especially following a sharp increase in defaults late last year – had weighed on a gauge of SOE bonds.

The ATF Enterprises sub-index climbed 0.03% after the IMF announcement on hopes it might galvanise officials to shore up and strengthen the sector. The measure has slumped 0.90% in the past two quarters.

  • Additional reporting by Reuters    

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