Socio-Economics History Blog

Socio-Economics History Blog

We Now Have An ETA When The Biggest Bond Bubble In The World Will Burst

by mosesman

Supernova-Explosion-Animated

China_Flag_Nuclear_Explosion

  • We Now Have An ETA When The Biggest Bond Bubble In The World Will Burst
    by Tyler Durden, www.zerohedge.com  
    Together with Greece briefly soaring to prominence over the summer (only to fade into perpetual obscurity in its new role as Germany’s certified Mediterranean colony), the biggest event of this past summer – before the EM capital flow/Fed non-rate hike fiasco – was the rapid boom and spectacular bust of China’s equity market, which culminated not only in arrest of sellers, but in the hiking of futures margins so high that nobody actually trades in China any more. 
    –
    However, China’s equity bubble was just the beginning. As we showed in “If You Thought China’s Equity Bubble Was Scary…” even after the Shanghai Composite crashed in the fall, Chinese bonds spreads continued plunging oblivious of everything that was taking place in the stock market.
    …
    The problem with that is that as BofA’s David Cui notes today, China’s bond market is the epitome of a “potential source of financial instability.” Here is Cui:
    –
    Our analysis shows that:
    1. the bond market is clearly not pricing default risk properly;
    2. the bond market has taken a few SME bond defaults in stride and seems to be counting on bail-outs of the few SOE bonds that are reportedly facing default risk; and
    3. leverage in the bond market is rapidly building up.
    –
    But most importantly, Bank of America has now given a time frame in which China’s bond market will blow up, resulting in far more dire consequences that the equity bubble bursting this summer. 
    –
    On the current trajectory, we doubt the market can stay stable beyond a few quarters, especially if some SOE and/or LGFV bonds indeed default. 
    –
    Why it will be far more dire? Because as of this moment China has between $25 and $30 trillion notional in financial and non-financial corporate credit (in China, where everything is government backstopper, there isn’t really much of a difference), about 5 times greater than the market cap of Chinese stocks (and orders of magnitude greater than their actual float), and 3 times greater than China’s official GDP, which also makes it the biggest bond bubble in the world, even bigger than the US Treasury market.
    –
    read more.

end