China’s Record Yield Curve Inversion “Spells Disaster”

Overnight we noted that the Chinese stock and bond markets ‘turmoiled’ as The National Congress came to an end and the forced repression of any weakness ended. Perhaps the most critical aspect of the moves was the push to new record levels of inversion in the Chinese sovereign bond curve.

The Chinese yield curve has now been inverted for 10 straight days – the longest period of inversion ever…

As Bloomberg reports, Qin Han, chief fixed-income analyst at Guotai Junan Securities Co., doesn’t mince his words when it comes to the rout in Chinese bonds.

“Considering the pace of the slump, which is very fast, it’s fair to say we are likely in a bond disaster…”

The yield gap will widen further, and the cost on debt due in a decade will likely reach 4 percent “very soon,” Qin added.

“The yield will become even more inverted as fragile sentiment prevails,” he said.

“Yes, this is overselling, but it’s not the time to buy yet as the overselling could last longer.”

Additionally the pain in bonds is spreading to stocks... (thought it looks like The National Team did step in to stabilize things…

“Pessimism in the bond market is spilling over to the stocks,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong.

“Surging yields of the government bonds are resulting in worsened sentiment and higher funding costs for companies, of which smaller ones will suffer most as they rely more heavily on the market rather than bank loans for financing.”

“Previously the market was stable because the National Team was there during the Party congress,” said Ken Chen, an analyst at KGI Securities Co.

“Now the meeting is over, and October’s economic data are expected to be worse than September’s, which worries investors.”

There are also early signs economic data may weaken, after solid figures for most of this year buoyed equities.