(Bloomberg) -- A flurry of news on China’s use of special sovereign debt to fund fresh stimulus highlights a growing risk to its record bond rally — a surge in new supply.
Officials have issued some 752 billion yuan ($107.2 billion) of the securities so far this year out of a planned 1 trillion yuan by November, according to calculations by Bloomberg. Now they are said to be mulling an additional 1 trillion yuan of capital injection into banks, mainly using special bonds, Bloomberg reported on Thursday. And Reuters reported a planned 2 trillion yuan of special issuance this year for local government use and to stimulate consumption.
Alongside the Politburo’s pledge for sufficient fiscal spending, the reports led to a selloff in China’s 30-year government bonds, where yields surged by the most in nearly two years on Thursday. The longer-dated yields extended gains Friday, having hit the lowest since at least 2005 earlier this week. Thirty-year bond futures slumped.
While any decisions remain to be confirmed and details finalized, the reported debt issuance would bring significant upside to sovereign debt supply.
“Based on experience last year - when additional debt quota was approved in October and actual issuance started in November - we also see additional bond supply toward late 4Q,” said Becky Liu, head of China macro strategy at Standard Chartered Bank Plc.
Liu expects China’s yield curve to continue to steepen with supply as one reason and the stronger-than-expected stimulus plan another.
The slide in bonds comes in sharp contrast to the red-hot rally in Chinese stocks, which were on track for their best week since global financial crisis. China’s campaign to boost market confidence this week has boosted risk appetite and dampened demand for haven assets.
“The long-end 10-year yield will see further upward pressure due to the special sovereign bond issuance,” DBS Bank strategists including Nathan Chow and Samuel Tse wrote in a note. “The return of investor confidence in the Chinese economy will also contribute to the upward march.”
(Updates with bond futures decline and DBS comment.)
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