This move is set to be an even bigger demonstration of China’s pull in the international bond market, initial signs showed little hit to buyer sentiment from the biggest sell-off in world stocks since February and a retreat from credit and emerging markets.
Price guidance on the 10-year note offering, at 65 basis points over Treasuries, was wider than where China’s 2027 dollar bonds were indicated. However, orders so far well exceeded the total on sale.
Ziyun Wang, partner and senior portfolio manager at DeepBlue Global Investment Ltd stated: “The bond issuance is more like a vote of confidence in China’s creditworthiness.”
Spreads on China’s five-year notes were tipped at 50 basis points, while the debut 30-year offering was quoted at 90 basis points, according to people familiar with the deal who asked to remain anonymous as they are not authorized to speak publicly. Orders for China’s three-tranche issue total more than $10 billion so far, according to people who are familiar with the matter.
The sovereign’s latest offering comes amid a jump in benchmark 10-year Treasury yields to the highest since 2011—which in turn contributed to equity benchmarks tumbling around the world this week. The Shanghai Composite Index was down more than 4%, and Japan’s Topix Index lost more than 3%, in Thursday afternoon trading.
The credit world showed signs of stress as well. The cost that comes in insuring Chinese sovereign bonds against default for five years spiked to a three-month high. Chinese investment-grade bond spreads have also widened in response, according to traders. The Yuan, is also under strain—being down 0.3% in offshore trading as of 12:55 pm in Hong Kong.
China resumed sales of dollar bonds last year after a hiatus of more than 13 years. Market players saw it in part as a move to reduce offshore borrowing costs for corporate Chinese issuers. That didn’t really happen however.
Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group stated: “ Last year’s offering proved to be the high-water mark in sentiment, and China’s blue chip SOEs have underperformed U.S. credit this year.”
“This year’s deal may not help reverse that.” He added.
Despite all that, Angus To, deputy head of research at ICBC International expects the new bonds to attract strong orders – because they offer an attractive yield pickup over the existing ones. China sold $1 billion each of five and 10-year bonds in late October 2017. The two tranches, which were priced at premiums of 15 and 25 basis points, were indicated at 26 and 41 basis points at 1:51 pm in Hong Kong, according to data compiled by Bloomberg.
Regular issuance of US dollar bonds by the sovereign would still help establish a reference yield curve for state-owned companies. This can be of help to Chinese issuers as they seek to refinance some $104.2 billion of dollar notes that are set to mature through 2019, according to Bloomberg data.
Anne Zhang, executive director for fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. stated: “The fact that the China sovereign bond is coming today as planned against the very weak market backdrop — with U.S. equities tumbling overnight means demand is very likely well anchored.”