China Bonds Are Cheapest Relative to U.S. Debt Due to Sharp Rout

(Bloomberg) -- China’s government bonds are the cheapest relative to U.S. debt on record, following the worst selloff of the notes in nearly four years.

The yield on Chinese sovereign notes due in a decade jumped 2 basis points to 3.05% on Tuesday, expanding its premium over the cost on U.S. Treasuries of the same tenor to 237 basis points. That’s the largest gap since data going back to 2005. The Asian nation’s bonds suffered the worst rout since late 2016 on Monday.

The selloff has come amid a surge in risk appetite, with the Shanghai Composite Index posting its biggest single-day gain in five years on Monday. The debt is also pressured by concerns over a liquidity shortfall as the nation plans to sell 1 trillion yuan of special government notes by the end of July. Instead of soothing investor nerves, the central bank has net drained cash from the financial system for eight straight sessions, again hurting sentiment in the fixed-income market.

The sovereign-bond weakness is also spilling over to the credit market, where companies are shelving plans to sell debt as borrowing costs surge. They canceled about $11 billion worth of deals in June alone, according to data compiled by Bloomberg.

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