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China Bond Auction Fails As PBOC Weakens CNY, Stymies Carry Traders

Tyler Durden's picture


It appears the PBOC is hell-bent on destroying any trend idea for carry traders to jump on. After 4 days of strengthening the CNY... and sell-side strategists already jumping on the new trend bandwagon with trade recommendations, the PBOC surprised last night and weakened the currency fixing. It is clear from this action that the PBOC is serious about stopping the hot flows... the problem is, it has consequences. Last night saw China unable to sell its entire 1 year bond offering (even at a rate of 3.32% - dramatically higher than European or US short-dated debt). Copper prices have stumbled, USDJPY is fading and US equities doing the same for now as carry unwind butterflies flapping their wings in onshore CNY can cause hurricanes in global liquidity fed capital markets.


After 4 days of strengthening the CNY fix, the PBOC weakened it last night - throwing trend followers off completely...


But this meant, unable to hedge the FX exposure, demand for bonds was subdued...


Even as they offered 3.32% (plenty of yield for anyone desparate)...

Which led to major Copper weakness...


And the ubiquitous JPY carry over which is driving US stocks...


With increasing chatter of an earlier withdrawal from QE in the US and now the PBOC really stirring the pot, perhaps the new normal is about to morph into a status quo attempting to increase uncertainty - instead of suppress volatility - as we noted previously.

As we recently noted, central banks will need more FX and asset market volatility in order to provide low rates for an extended period. The argument goes like this:

1) Low realized and implied volatility have come as a surprise to investors


2) Investors are underinvested out of skepticism that the low rates, low volatility environment will persist


3) If the central bank mantra of “low rates, low vol forever” persists in asset markets, investors will buy high beta assets and add leverage


4) Asset prices will respond much more to rates incentives than (so-called) rates sensitive sectors of the economy


5) Central banks want to keep the low rates without creating an asset bubble and will purposely induce volatility to calm speculation

And that is not priced in...

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Wed, 06/11/2014 - 08:37 | 4843948 ArkansasAngie
ArkansasAngie's picture

Well ... gee ... does this mean that TBTF are going to have to report a one day trading loss?  Hot money?  You mean banksters?


Remember ... voting is the perferred means of throwing the bums out.

Wed, 06/11/2014 - 08:42 | 4843970 RagnarDanneskjold
RagnarDanneskjold's picture

The latest empty house estimate, a major survey of more than 1,000 communities by the China Household Finance Survey.

CHFS Estimate: China Has 50 Million Empty Homes Backed By ?4.2 Trillion Debt

Wed, 06/11/2014 - 09:30 | 4844164 Wild Theories
Wild Theories's picture

Interesting link, thanks.

Wed, 06/11/2014 - 08:44 | 4843976 youngman
youngman's picture

I tried to buy some..but they would not take my copper as collateral...

Wed, 06/11/2014 - 08:50 | 4844000 _ConanTheLibert...
_ConanTheLibertarian_'s picture

They are loosing it. Jump you fuckers!

Wed, 06/11/2014 - 08:54 | 4844011 AccreditedEYE
AccreditedEYE's picture

Who wants to bet we're green by noon? You can't scare this market... it's like that scene in 300... "This. Is. GOLDMAN!"

Wed, 06/11/2014 - 08:56 | 4844018 q99x2
q99x2's picture

If you go by 1/2 degree virtical from 89 toward 90 and then go a 1/4 degree from 89 1/2 towards 90 and then go 1/4 degree from 89 3/4 by an 1/8 degree and so on do you ever go vertical?

if not for a very long time then PRINT and BTFD.

Wed, 06/11/2014 - 09:17 | 4844119 SAT 800
SAT 800's picture

took three new Yen Short contracts this morning @.009813 / basis Dec.

Wed, 06/11/2014 - 09:40 | 4844199 headhunt
headhunt's picture

Gravity - it's a bitch.

Physics applies to all things including economics - Keynesian are the flat-earthers of economics - aka Economic Reality Deniers

Wed, 06/11/2014 - 10:33 | 4844451 MFL8240
MFL8240's picture

Cant Belgium buy them?

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