One day after China's regulator halted trading in bond futures for the first time ever, Beijing suffered another catalytic bond-market event overnight when it failed to sell all the Treasury Bills on auction Friday, for the first time in almost 18 months, as bids fell short of minimum requirements, according to traders required to bid at the auction.
As BBG reported overnight, the Ministry of Finance sold only 9.57 billion yuan ($1.38 billion) of 182-day bills in a planned 10 billion yuan sale, and 10.85 billion yuan of 91-day notes in a planned 12 billion yuan sale, according to a statement from the bond clearing house. What is notable, is that the Bills on offer paid a hefty yield: the 182-day bills sold for 2.9565%, while the 91-day bills sold for 2.8991%.
In other words mainland bond traders are concerned that short-term China rates could spike substantially in the next 3-6 months.
The failed auction comes despite the December 2014 adoption of a "primary dealer" system which includes 50 banks and which are required to bid at debt sales. On Friday, more than one of China's dealers did not do as mandated, leading to the unexpected outcome.
In an amusing comment shared yesterday by the WSJ, Hao Hong, co-head of research at Bocom International said that "People woke up to the fact that the bond bubble is too large. The bond market in China is under severe pressure, across the board." Today's event confirmed his observation.
The auction failure has come amid a debt selloff that has surprised investors, and which many dubbed as indicative of the bursting of the Chinese bond bubble after China's 10-year sovereign yield plunged the most on record Thursday, leading to a brief freeze in futures trading in the $9 trillion bond market. The notes are pressured from a combination of factors, with hawkish Federal Reserve comments adding to the heat from the yuan’s decline and waning money-market liquidity. The People’s Bank of China has steered borrowing costs rates higher, forcing a correction in the highly leveraged market.
“No one has the time or demand to bid for short-end government bonds,” said Guotai Junan Securities Co. bond analyst Xu Hanfei. “Short-term funding is tight, money-market fund redemptions are ongoing, certificate of issuance rates are rising and short-term liquidity hasn’t eased markedly. In addition, sentiment in the bond market is poor. Even demand for short-end bonds is weak.”
Hopefully demand for longer-dated bonds will be stronger, although that may be bold assumption: “the Chinese bond bull market is over, as we have seen a turning point in money market rates this year,” said Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management, referring to a tightening of liquidity in China that began this autumn and has recently gathered pace. If that view becomes prevalent, failed auctions will be the least of Beijing's worries.