China's anti-leverage move distorting bond market

Shanghai

CHINA'S anti-leverage campaign is causing a distortion that hasn't happened in the nation's US$9 trillion bond market in at least a decade.

The five-year sovereign yield is now higher than that on debt due in a decade, the first time the curve has inverted for the tenor in data going back to 2006. This is due mainly to a surge in the shorter-term yield because of a deleveraging campaign, and a limited advance in the 10-year cost as economic growth concerns raise demand for safety.

The inversion illustrates the risk of China's campaign to reduce leverage in the financial system, with higher borrowing costs influencing the corporate bond market and driving up rates for companies looking to refinance short-term debt. The nation's nascent economic recovery is being pressured as well, with initial indicators including that on manufacturing suggesting that activity is …