China’s Rising Sovereign Yields Are Stirring Its Corporate Bonds

(Bloomberg) -- A sell-off in China’s sovereign notes is weighing on its corporate bond market.

The yield spread between the country’s top-rated three-year corporate bonds over government securities of the same tenor widened this week to its highest in four months, according to data compiled by Bloomberg. That’s after the 10-year sovereign bond yield rose to the highest in five months. It’s also hit sales of new company bonds, with the most amount of cancellations this month since June.

“High-quality corporate bonds are far more sensitive to changes in the government bond market as they are more liquid than lower-rated notes,” said Citic Securities Co. analyst Lv Pin. With credit risks remaining high, some companies that regularly sell new notes may face refinancing difficulties amid expectations that yields will rise, he added.

China’s sovereign bonds sold off this week as the central bank allowed its cash injections to mature. Its inaction has effectively drained 560 billion yuan ($79 billion) from the financial system, increasing concern about the prospect of tighter liquidity. Accelerating inflation and a looming wall of supply have also added to the gloom.

©2019 Bloomberg L.P.