This page has been archived and commenting is disabled.
We Now Have An ETA When The Biggest Bond Bubble In The World Will Burst
Together with Greece briefly soaring to prominence over the summer (only to fade into perpetual obscurity in its new role as Germany's certified Mediterranean colony), the biggest event of this past summer - before the EM capital flow/Fed non-rate hike fiasco - was the rapid boom and spectacular bust of China's equity market, which culminated not only in arrest of sellers, but in the hiking of futures margins so high that nobody actually trades in China any more.
However, China's equity bubble was just the beginning. As we showed in "If You Thought China's Equity Bubble Was Scary..." even after the Shanghai Composite crashed in the fall, Chinese bonds spreads continued plunging oblivious of everything that was taking place in the stock market.
This historic bond bubble is paradoxical for the simple reason that China's credit fundamentals have never been worse, and as we further showed, as a result of the ongoing collapse in commodity prices (which today's Chinese rate and RRR-cut will have absolutely no impact on), more than half of commodity companies can't generate the cash required to even pay their interest, a number which drops to "only" a quarter when expanded to all industries.
"The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid," said Xia Le, the chief economist for Asia at Banco Bilbao. "A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets."
"Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash... This game can’t go on forever."
They will find it soon, because while China may have managed to once again kick the can on its most recent default when state-owned SinoSteel failed to pay due principal and interest this Tuesday only to get a quasi-government bailout, every incremental bail out merely forces even more cash misallocation and even more foolish "investments" into this high risk asset class as investors ignore any concerns about fundamentals, assuming instead that the government will always bail them out.
The problem with that is that as BofA's David Cui notes today, China's bond market is the epitome of a "potential source of financial instability."
Here is Cui:
Our analysis shows that:
- the bond market is clearly not pricing default risk properly;
- the bond market has taken a few SME bond defaults in stride and seems to be counting on bail-outs of the few SOE bonds that are reportedly facing default risk; and
- leverage in the bond market is rapidly building up.
But most importantly, Bank of America has now given a time frame in which China's bond market will blow up, resulting in far more dire consequences that the equity bubble bursting this summer.
On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default.
Why it will be far more dire? Because as of this moment China has between $25 and $30 trillion notional in financial and non-financial corporate credit (in China, where everything is government backstopper, there isn't really much of a difference), about 5 times greater than the market cap of Chinese stocks (and orders of magnitude greater than their actual float), and 3 times greater than China's official GDP, which also makes it the biggest bond bubble in the world, even bigger than the US Treasury market.
Here is the full explanation why BofA expects some time around next summer is when the biggest bond bubble in history finally explodes:
The rumble of distant drums
When a developer can issue a 5y bond at 3bp lower than 5y quasi-sovereign CDB bond’s yield, the market appears grossly mispricing risks in our view. Credit spreads of LGFV, corp. and enterprise bonds are all at or close to five-year lows at the moment.
Investors are chasing yield, due to rapid money expansion (M2 at 13.1% in Sept vs. 6.2% nominal GDP growth in 3Q). AUM of bond and money market mutual funds expanded by Rmb1.6tr Jan-Sept and by Rmb1.3tr alone since July after the A-share correction vs. Rmb44.1tr bond outstanding as of Sept.
This is in addition to those inflows from the wealth management products and private funds.
Leverage is also rapidly escalating. Bond repo balance rose by Rmb1.9tr from Aug 12 to Oct 21 (Rmb4.4tr to Rmb6.3tr, Chart below).
Banks use repos to manage short term liquidity; investors, to subscribe to IPOs, and lately, to buy more bonds. We suspect that bond buying has been the primary driver of the growth in repos since July given rising excess reserves at the banks and the weak stock market. Structured bond funds, often providing 4-10x leverage to lower-tranche investors, is another concern. But its size appears small at this stage.
Moral hazard is playing a key role – there is no official default so far in the bond market other than some small SME bonds. Credit spreads narrowed on most occasions when major bond default threats surfaced, suggesting that most investors probably counted on bail-outs (Chart 5-7). Meanwhile, about 2/3 of repos are on less than 7-day term.
Finally, to answer the question on everyone's mind - here is the full list of most likely upcoming Chinese debt default cases. When the bubble bursts, these names will be the first to blow up.
»
- 80175 reads
- Printer-friendly version
- Send to friend
- advertisements -
Ahahahahahahahahahah!! Crash and burn like the Hindenburg!
Just make sure you have some http://zhc0.com first
Transitory.
I'll believe it when I see it
just tell me the fucking date.
4 am...cant sleep but you made me laugh...thanks...
Whois Record for zhc0.com
Created on 2015-10-11 - Expires on 2016-10-11 - Updated on 2015-10-15
I'll just leave this here.
Walmart will be pretty pissed.
15horses1donkey.
IF ZERO HEDGE HAD A FUCKING CURRENCY OF IT'S OWN, IT WOULD BE MINTED IN INCORRUPTABLE NON HYPOTHECATED NON DERIVATIVE NON MARGIN ABLE SILVER OR GOLD.
Jesus, fucking kids these days. You all think technology is a miracle. All it is is electrons that can be made to go poof any fucking minute now.
Crypto currency is just a fancy name for digital fractional reserve banking - without the reserve, or the bank.
If I blew up your phone right now, you would look like a cow at the slaughterhouse just at the moment the bolt gun goes off - " How could you do this to me ? What'll I do now ? "
Improvise. Adapt. Overcome. Triumph over adversity.
And, transform your idea into minting a fucking physical coin out of noble metals, with Tyler's permission, before he copyright lawyers your ass into bankruptcy.
When China finishes strip mining Australia for resources to feed a failed consumption based world economy, and starts using the holes for landfill, I see a bright future for you picking scrap for pennies.
Until then, lube up your crypto currency with Marmite, and shove it up your ass.
Why don't you two get a room, where you can Ctrl-C, Ctrl-V all day long?
Hey now the tech junkies can buy a water bottle from thermos that talks to their Fitbit and tells them how much water they have consumed. (Ideal for narcissists...)
Meanwhile back on earth...we read 51% of working Amerikans are making less than $30,000 pre tax - add soaring rents and gubamint imposed O-Nocare (or you get taxed by the IRS. SUBMIT!)... so who has money for a tech baby talking water bottle and why?
Yellen's NIRP Gun is loaded... I prefer phyzzz...as all the paper "assets" gets burned.
No Way..
Printing up PILES of Paper will Continue
To Make EVERYTHING FUCKING WONDERFUL!
HAHAHAHAHA!!!!
bullish
zerohedge options avail cept phyyyyyyyyyyyyyzzzzzzzzzzzzzz.
hello:-)
welcome
to
the
party!
come in and take your toga off....
Central banks can print much longer than logic, rationality, or your ability to defy. Poof, sometime this century.
You've got the concept, I think, but are lagging . The start was in the last century.
The proof has been apparent since "deficit' spending was coined.
Sorry....spending was papered.
Edit again.........spending was digitalis-ed.
There fixed it for me.
Maybe a little off topic, but I wonder how much of this is fact and how much the author came up with things from "people familiar with the matter."
Maybe one of the Tylers can comment one way or the other.
http://nymag.com/guides/money/2009/59457/
@Palladin,
None of it is fact, it is all fiction because it is based on manipulated markets, fiat money, and it's source is a TBTF bank that stole millions, if not billions, from the US taxpayer. That means you and me. Also, if you read the article, the headlines of an ETA does NOT match up with the statement about this happening in a few quarters. A few quarters is vague and not an ETA. Furthermore, the estimate of when the bond market goes to hell is based on algos that were developed for conditions present when markets are not manipulated. The current markets don't reflect the assumptions made when the algos were developed.
What part of it exactly are you here to question? Since they don't mention me in particular, yes I did write the best comment on ZH ever written -- probably twice. It's been 5 years of hell let me tell you.
ya, but you cougarz can suck it up and keep on goin'!!!!!
Cats have nine lives, yer good...
;-D
15horses1donkey.
IF ZERO HEDGE HAD A FUCKING CURRENCY OF IT'S OWN, IT WOULD BE MINTED IN INCORRUPTABLE NON HYPOTHECATED NON DERIVATIVE NON MARGIN ABLE SILVER OR GOLD.
Jesus, fucking kids these days. You all think technology is a miracle. All it is is electrons that can be made to go poof any fucking minute now.
Crypto currency is just a fancy name for digital fractional reserve banking - without the reserve, or the bank.
If I blew up your phone right now, you would look like a cow at the slaughterhouse just at the moment the bolt gun goes off - " How could you do this to me ? What'll I do now ? "
Improvise. Adapt. Overcome. Triumph over adversity.
And, transform your idea into minting a fucking physical coin out of noble metals, with Tyler's permission, before he copyright lawyers your ass into bankruptcy.
You must have been dropped on your head repeatedly as a child - Americans aren't gonna buy in to an Australian electron based fakey doo currency.
Australia is just an open pit mine for the Chinese economy - until it isn't. Then, it becomes a landfill for all of the crap that China doesn't want. So, I see a great future in resource management for you all down under.
Schilling electrons ? Not so much.
Please stop posting this babble.
I went by Sleep Train Arena in Sacramento to purchase tickets for their October 28 home opener against the Clippers. They wouldn't accept my gold coins, so I paid with Bitcoin. Also, if my children get kidnapped and demand my gold coins, I might lose both. Just sayin'
Everything is better with extragooderestwonderful on it...yay!
PRINT MOAR
A few qtrs huh? Others beside BofA give the whole works until September 2016 before it blows its wad...
Sounds about right but maybe after the election. Look what happened when George W. was on his way out.
You can provide all the data you want Tyler, economics is proven to be a million miles from an exact science and the Central-Bank command and control central planners are for now omnipotent. Greece defaulted and life still continues like nothing happened. This one event confirmed everything I'd learnt and believed about economics and monetary policy was a lie, confirmed our system was a fraud and the free market was anything but free. I've always believed ground zero would be the collaspe of the bond market, but I'm not even sure of that anymore. I'm just holding onto my gold and silver, wait and see where the chips fall and take things from there.
Dupe
Estimated percentage change since 2010 in household food consumption in Greece : –15
That be a pretty durned quality review of the Chinese debt situation, Tyler.
Great work. Kudos and many thanks!
Bullshit! When central banks buy it all, they will own it all. Who the hell needs bond buyers when you have CB's. You all don't pay attention. Money talks and bullshit walks. And the CB's have it all covered.
You know the crash is near if GS comes up with a structured product full of this shit and sells it to the muppets
(and shorts the entire offering)
I think Bernie Sanders quit the muppets
off balance sheet, pooof, gone to print moar and moar. left in the wake; billionaires and desparados. the new normal and no trace of a structural problem. this goes on til a real war disrupts the balance of power...
good. maybe then the blood will start flowin'.
I don't know the ETA but it will be DOA.
Nine more cogs were blown up in a chemical explosion in Shangdong this week, in addition to the 120 torched in Tianjin over the summer. 25 to 30 tril in notional corp credit oustanding? Repos shmepos. Beijing doesn't give a fuck. 80% of all homes purchased in Irvine are by Chinese nationals; the smart ones have passports at will get out when SHTF. They'll call it debtspionage, but they need somebody to blame and there are plenty of warm bodies to go around (if they're not breaking through the nets at Foxconn). When this debt shitpile explodes the whole fucking world will look like Somalia so get used to it. Sad
We will be into WW3 before it has a chance to blow up.
Hmmm, imagine going from Senior bondholder to penniless. Quite a lifestyle change there hoss.
Good thing we bought that business block in Alberta, roundeyes.
--A. A. Briss.
Now that we know said ETA date, the fear and loathing will cause premature emasculation of investors and the hilarity will ensue and things will get messy well before next summer.
BS. There is no Govt backstopper explicit or implicit on Private Sector Bonds. There is no large retail market for bonds. Yield chasers are mainly the asinine fund managers including the foreign funds that have bought this crap. It is a command and control economy. The financial economy is not significant. Zombie SOE Bonds will be propped and they will let the Private Sector Bonds go. It is a long landing scenario not a hard landing. They can manage with no social unrest from unemployment provided by their zombie SOEs in a downsized economy.
Spillovers are different matters as they have no pretensions to be global economic saviours. Everything like transition to a consumer based economy, internationalization of the RMB, New Silk Road, etc. are taking the back seats. They can smoke too.
Sum ting wong.....
BofA predicted the China demise?? Funny...
BOFA, CITI, JPM, GOLDMAN are playing derivatives, with leverage of >70x. Look at the report by FDIC monthly.
China is export based economy (and i think it would still be for some longer more time, before it's refocus to consumer based economy). It has positive current account. And the biggest FX reserves. And it nearly acrued IMF's SDR status.
Now SDR baskets, currently consists of currency by highly indebted nations. The inclusion of Yuan, gives you options, of which currency you want to stores at IMF for your SDR funds.
Although china debt also high (relatively compared to debt/gdp ratio). Again, china still has positive current accou & highest nominal Fx reserves. Which give more assurance for its currency.
I'm not an economist. But i'll bet, we still talking doomed dreams of china by end of next year (w/o the realizations pf real doom events).
However, the yuan's inclusion by IMF? Actually would increase the chance of that BofA (and other americans banks) exposure to a margin call. And the US govt would need to bail them out, once again..
Consider the films 2001: A Space Odyssey and 2010, it's sequel. In the film 2001, made in 1968, we have a space program portrayed in 2001, that in the year 2015 has yet to materialize. At least, a space program that is public and on the books. In the film 2010, made in 1984, USSR tensions coming to a peak in reality, we are to believe in 2010, the USSR will be alive and well, and about to go to war with NATO and the U.S. The reality proving six years later, there is no more USSR, to be replaced with a far more benevolent RF. So Hollywood gets it wrong twice. I guess one CIA agent at a party got some bad intel.
The point of all this? I would not trust any of this so-called conventional wisdom. That wisdom that say, we got plenty of time. The [monetary] collapse will not happen on my watch. I suggest. My gut feeling tells me. It is very, very near.The pressure cooker is about to blow. It will be before the end of the year. Probably before Christmas. I say even before Dec. 1st ..
Just a gut feeling ..
https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp (Read Me First)
Lindsay Williams gives better ETAs than this article.
How this works is the Chinese govt allows much larger leverage overhangs than in the West under the explicit pretext that they'll be backstopped by the central bank.
As in the west this process makes the debts unpayable, because the currency is equal to the face value of the debt...which itself is written without collateral. But the total debt is face value plus interest.
As in the West, this process results in an ever larger portion of the debt representing accumulated interest.
To the extent real interest rates are suppressed, and these unpayable debts backstopped by govt and central bank, the process of accelerating to a crack up boom is accelerated.
"more than half of commodity companies can't generate the cash required to even pay their interest".....oh really? What is the problem? Just rewrite under new terms!
or just change the interest to negative and then you are making money...right?
I think I am going to go buy some gold coins....barter economy is our future
After dealing in fake stats and fantasy markets in the land of OZ, I think people will prefer a stable honest form of trade.