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Matthias Knab, Opalesque: PIMCO writes on Harvest Exchange:
Why China's yield curve became inverted and what it means for the economy.
In the bond market, an inverted yield curve has often predicted recession in developed economies. So what does the recent inversion of the yield curve in China say about the country's economic outlook?
Since 2005, the yield on the 10-year Chinese government bond (CGB) has exceeded the one-year CGB yield by an average of 100 basis points (bps). An upward-sloping yield curve of this sort is normal in the $3.5 trillion CGB market and, as in most countries, reflects expectations for future policy rates, a term premium and healthy market supply-demand dynamics.
But on 7 June, the 10-year CGB yield sank below the one-year yield. This yield curve inversion has occurred only once before, in June 2013, amid a severe liquidity crunch in the interbank market.
What is causing the current yield-curve inversion? We see four main drivers:
The People's Bank of China (PBOC) has tightened monetary policy since the fourth quarter of 2016 to curb an asset bubble, mitigate financial leverage and support the yuan. Since the end of the third quarter of 2016, the 10-year CGB yield has risen 85 bps to 3.59%, and the one-year yield has risen 145 bps to 3.62%.
The PBOC hiked the seven-day re......................To view our full article Click here
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