Stock information is displayed on an electronic board at a securities brokerage in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

China Bond Rout Is ‘Early Warning Signal’ to Global Debt Market

(Bloomberg) -- The selloff in China’s debt market is a precursor for what global bond traders can expect as reflation gets underway, according to Sean Darby, chief global strategist of Jefferies Group LLC’s Hong Kong unit.

While declines in Chinese debt have been exacerbated by a crackdown on shadow banking and attempts to curb corporate borrowing, Darby says global yields are set to follow suit as markets start to price in tighter monetary policy by central banks and as China exports inflation.

China “was the first one really to reflate from 2016,” Darby told Bloomberg in an interview in Hong Kong. “Expansion of essentially quantitative easing by the People’s Bank of China is in one sense also being reversed as the yield starts to shift upwards.”

Yields on China’s sovereign and top-rated local notes climbed to the highest level in three years last week, while a measure of the nation’s core inflation -- which excludes food and energy prices -- has risen to a six-year high of 2.3 percent.

This normalization in bond yields is going to happen globally, said Darby. “China’s been the early warning signal for the rest of the world.”

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