Third Chinese Bill Auction Failure In 2010

As the Chinese economy overheats yet again (when did it ever stop?) and inflation accelerates to an annual 3.1% pace as reported earlier by Bloomberg, one unfortunate side effect, which the US will become only all too familiar with in due course, is today's most recent failed Bill auction, as China failed to attract enough bidders to cover the total offering amount of 15 billion yuan in 91-day bills. This is now the third failed auction for China in 2010 alone. Luckily, that particular country does not have to roll $150 billion in debt every week or so. The reason for the failure: the inability of the government to compensate investors for surging inflation risk, as demand for higher yields keeps bidders away. This once again is forcing the country to reevaluate its interest rate policy - being pegged not only to the dollar but the US Fed's monetary policy, is no longer a viable option. Of course, should a failed bill auction ever happen in the US, it is game over.

More from Bloomberg:

China failed to draw enough bids at a sale of treasury bills for a third time this year as banks sought higher returns from longer-dated debt to protect against inflation.

The finance ministry issued 11.45 billion yuan ($1.7 billion) of the 15 billion yuan of 91-day securities on offer at an average yield of 1.9062 percent, according to traders at BOC International Holdings and Agricultural Bank of China, who asked not to be identified. It sold 17.75 billion yuan of the 20 billion yuan of 273-day securities at an average yield of 2.0511 percent, the traders said.

The yields on shorter-dated debt are too low to attract investors as inflation quickens,” said Liu Junyu, a Shenzhen- based fixed-income analyst at China Merchants Bank Co., the country’s fifth-largest lender by market value. “Also, there is a shortage of cash in the financial system.”

Additionally, as we cautioned previously, the 7-day Repo in China is once again surging. Keep a very close eye on this metric as it could show that the European liquidity scarcity is moving over to Shanghai.

China failed to draw enough bids at a sale of treasury bills for a third time this year as banks sought higher returns from longer-dated debt to protect against inflation.

The finance ministry issued 11.45 billion yuan ($1.7 billion) of the 15 billion yuan of 91-day securities on offer at an average yield of 1.9062 percent, according to traders at BOC International Holdings and Agricultural Bank of China, who asked not to be identified. It sold 17.75 billion yuan of the 20 billion yuan of 273-day securities at an average yield of 2.0511 percent, the traders said.

The yields on shorter-dated debt are too low to attract investors as inflation quickens,” said Liu Junyu, a Shenzhen- based fixed-income analyst at China Merchants Bank Co., the country’s fifth-largest lender by market value. “Also, there is a shortage of cash in the financial system.”

We hope more than just a handful of people read that last sentence.