Chinese bond auctions shows signs of overheating

China today auctioned 10-year bonds with the lowest coupon seen since 2008, showing that investors has found new gateway to push money into as stock market crashed. Yield on the 10 year bond was just below 3%, which is lowest since 2008.

Chinese bond market, which is now world's third largest surged in recent weeks. Yield on 5 year government bonds fell from 3.47% in April to 2.92% this week. Major decline has occurred since August turmoil in the market. Corporate issuers have jumped into the opportunity. Gross issuance has surged 63% this year to Renminbi 12.6 trillion ($2 trillion). Quarterly corporate issuance has surged by 91% as companies rush to the boom. Trading volume in China's interbank market has reached 110 trillion Yuan in third quarter of the year.

Today's lower than expected inflation data has opened door for further easing by People's Bank of China (PBoC), which could lead to some further rally in the market, however according to Bank of America Merryl Lynch analysts any sustained rally would require further aggressive easing and significant economic deterioration.

Recent report from Bloomberg suggests that leverage is increasing the market as retailers borrow money to buy more bonds.

Though there may not be any imminent collapse, but overall risk is clearly on the rise. Chart courtesy Financial Times.