China's Yield Curve Inversion Signals Sharp Slowdown Ahead

Tyler Durden's picture

As we have heard a million times on hundreds of business media outlets, the US 'cannot' be in recession because the yield curve has not inverted. Well, unfortunately for the savior-of-the-universe Chinese economy, their yield curve (the 2s-10s differential) has just inverted for the first time -  suggesting, as per Mike Darda of MKM, the Chinese economy is “set to slow rather sharply” and that has “negative implications” for commodities tied to industrial growth. Following on from our discussion of the 1tn RMB deposit infusion bailout, Darda also points out (via Bloomberg) the 8 months-in-a-row of OECD Leading index drops, weakness in the China PMI sub-indices, and the fragility of the shadow banking system via cracks in the real estate market and notes, with a wonderfully indignant note on CB success:

"It is worth remembering that the Fed has engineered only one soft landing in six decades of post-war monetary policy-making (1995)".

Further to this the FT reports a growing concern (noted here by HSBC's CEO Stuart Gulliver) over the potential for an Asian credit crunch both self-created and exogenously-driven by European bank deleveraging:

The strong increases in credit availability in Asia that has supported demand growth cannot continue indefinitely,” said Mr Gulliver, who was speaking in Hong Kong the day before his bank announces its third-quarter results.

“Any reduction in credit availability is likely to be gradual – but it remains a risk policymakers will need to manage. And we need to be careful to monitor the risk of a sharp withdrawal of credit by European banks as a result of events at home.”


And as the rate environment starts to adjust to 'slow' growth and a 'soft-landing', perhaps commodities will continue to slide south. Arguably - a 2s10s steepener on China seems like a way to play a harder-landing and the leading appearance of the commodity index suggests we have lots to look forward to (paging Dr. Copper?).

The CRB index appears to lead curve regime shifts - is the front-end of China's yield curve about to pop?


UPDATE: While the on-the-run 2y yield did trade above the 10Y yield on 9/26
(2s10s inverted), Bloomberg's generic 2Y CNY yield index has not updated in
three weeks meaning Mr. Darda's analysis is based upon faulty information. We do
not ethat since late September's inversion, however, the curve has begun to
steepen - which fits with the cycle turn analysis he discusses. (h/t SD!)

See below for the on-the-run 2Y and 10Y CNY bond yields:

Charts: Bloomberg

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Deadpool's picture

interesting.....the little growth engine that couldn't lead the world stalling. deflation in industrial metals, inflation in monetary metals. Good!

disabledvet's picture

From "sudden debt" to "sudden default." of course once you start you "can't put it down."

Hard1's picture

"Buckle belt seat. You are please brace landing hard for".



Ethics Gradient's picture

Speak to Hugh Hendry. Actually, don't. I imagine he's spent the past twelve hours orgasming at the amount of money he's made. I can't imagine he'll be very coherent at the moment.

Divided States of America's picture

Darda turning less bullish? Thats a change!

mirac's picture

maybe...but avoid those gold stocks that have a large copper component in its sales.  Gold and Silver may go down with the ship.

philipat's picture

Unlike in the "democratic" United Corporatocracy of America, China can, and does, move very quickly. They are already reversed into stimulus mode via injections of liquidity into the (Largely State owned) Banking system. Incidentally, they have USD 3 Trillion in reserves to play with.

PS. The Central Bank of China now appears to be buying Gold instead of Green paper, which should be of more concern to Tim and Ben.

PPS I wonder when Chanos' China shorts start to expire?

GeneMarchbanks's picture

Sharp slowdown? A ... a crash?

Great use of red arrows...

Dr. Engali's picture

The market is whistling passed the grave yard. California could be blown off the map and the market would still ramp up.

sodbuster's picture

Our bond markets are even MORE manipulated than the Chinese. How pathetic the US has become!

Withdrawn Sanction's picture

Pretty tough nut for the US to have an inverted yield curve when the short end's at zero.  Flat maybe, but a recession just the same.

hedgeless_horseman's picture



Tough nut is right!  Especially when the oil needed to loosen said tough nut on economic engine is at $116.90 on the spot market. 

Louisiana Light Sweet Crude Oil Spot Price of $116.90

DormRoom's picture

And yet the S&P is 20% away from its all time high with unemployment >9%, 40M on foodstamps, slowdown across most industries, EZ about to implode, and Iran-Israel war imminent.




If the VIX is a fear index.  The S$P has become a speculation index, and detached from the real economy.

AndrewJackson's picture

I agree 100%. I tell myself this same thing every day.

hedgeless_horseman's picture



Do understand the S&P500 is priced in dollars, and the difference between real rate of return versus nominal rate of return.

centerline's picture

Charles Hugh Smith nailed it earlier. The stock market, credit markets, etc. are all just life-support for munis / retirement funds. Otherwise, the bread and circuses would end quickly. The real action is in the bond markets / FX nonsense.

walküre's picture

When China stalls, the BDI should fall off a cliff. It's holding pretty steady still.

They can't manipulate shipping rates and shipping volume. That's where the rubber hits the road, where the metal hits the water literally.

Lots of new ships came online this year as well.

One of Germany's leading economic advisory board just revised their growth for Germany down. Recession in Europe is now inevitable. Most here believe the US never got out of the last one.

NO FURTHER EASING. GREATEST DEPRESSION FULL SPEED AHEAD. (and that is exactly what they had planned all along).

Let them eat iPads's picture

That doesn't look very steady at all.

EZT's picture

Now they need to bomb Iran, keep up industial metals, and oil.

SheepDog-One's picture

Looking at todays indexes, it seems to me the only game around is to trip as many stop losses as possible all day. 

jcaz's picture

Bonds never lie.....  Love it when yields invert in a freaky banking system.....

DormRoom's picture

Go to the economics history books.  No nation has been able to coordinate a soft landing after a property bubble.  All property bubble bursts have resulted in a hard landing.  If China can do it, she may be the first, but suffer other externalities.

Nemo01's picture

The market will take this bullish. It's the sign it has been waiting for - just look at what happened last time it inverted....

disabledvet's picture

It stands to reason that this is a direct result of the very real reality of a sudden default of the entirety of Italian debt. As has been reported China is a major holder of euro-denominated debt the annihilation of which is entirely calculable by the bond market in the form of an inverted yield curve followed by a recession. There is no substitute for diversification either in one's personal portfolio or just as importantly in how government in fact collect tax revenues. The bottom line is that the total reliance on Wall street for government revenue has been a total disaster for both. The only person I see setting the right example (finally!) is Jamie Dimon. His job is to talk with the Russian Oligarchs...not Congress.

YesWeKahn's picture

They print more than Bernanke, no worry in that front.

Shizzmoney's picture

And yet the S&P is 20% away from its all time high with unemployment >9%, 40M on foodstamps, slowdown across most industries, EZ about to implode

The bigger this thing gets, the harder the eventual fall.  I mean, we ALL know the market "push" is fake.

Unles Iran bombs Jerusalem.  Then the bull run continues.

moskov's picture





There are millions of Chinese are waiting for the property crash so that they can afford the housing as many as they, it will be a political suicide if Chinese government doesn't tackle the housing bubble before next year's change of power. The demand of property is still strong, but most of the people are waiting with their cash for the sudden drop of property prices.

Archimedes's picture

Wait! Am I high or did Tyler just give kudos to that Sleezeball Darda?

Stax Edwards's picture

This TD loves the white backgrounds on his terminal

chump666's picture

more bear signals out of China.  big one last mth/s or so was large CNY selling out of China and HK.  That is a classic example of a liquidity squeeze.  China's crash is coming, property through to developers to banks then finally local councils. going to be brutal

youngandhealthy's picture

Talk is cheap....! If ROW is going down...of course China will "talk down their currency too" (ref. FT article this morning)

Washington get their punishment now....don't call China a cheater...U will suffer. Fair? not if U ask me...but this is the world now.

chump666's picture

...that and all asian countries trade surplus are narrowing/pmi slowing, iron ore orices collpasing, copper trading lower.   

Dedwards's picture

Acapulco cliff dive, anyone?

chump666's picture

and someone please tell the dumb ass momo traders of wall street that italy's 10yr will hit the default range of 7% in 48 hrs.,.f*cking greedy rogue traders.

El Viejo's picture

Lets see when did it happen to US?  Was it June of 2008? This time we have too many looking at it so it could happen sooner.

When fear is rampant the markets become neurotic.


HFT ain't good for me. CDS's gonna make some messes. TBTF gonna fall off a cliff. Wall Street is dead meat. Banks so bold layin' dead and cold. Gonna be prepper people, and the rest of the Sheeple. God bless this mess. I'm a poet, and didn't know it.

sneering nihilist's picture

this is why i still come here everyday. thanks.

dylan1's picture

Hi Dylan,

Would like to know which instruments are you using to find out that the yield curve is inverted, are these 2 year and 10yr cny currency futures Thanks.


Chestire's picture

There is the unlikely probability of underwriting restriction in 2s4s given new Ministry of Finance guidelines:

Is liquidity (for these maturities) at risk?