More than a week ago, I shared with you a link about China's bond rally.
Now, more investors are pledging their bonds as collateral to buy even more bonds in order to increase their overall profits. The frantic rush to buy bonds could be due to the stock market's crash in the summer which push investors to buy bonds which are considered low risk while providing a steady income, and perhaps driven by the fear of further cuts in interest rate which could make income based savings more and more unattractive. But by pledging the bonds as collateral in order to reinvest the borrowed money only serves to magnify the risk level. Again we can see greed taking precedence over prudence.
The flight of capital into bonds is turning into yet another potential bubble.
Sinosteel has failed to make payment of interest due. How many more companies could face similar default as China is sitting on a US$16T corporate debt. These debts need to be repaid, and in a slowing economy, it just makes the task more difficult. A wave of potential default could cause serious repercussions in an already inflated bond market.
A bond market when it bursts, carries greater ramifications than a stock market crash because it will deter investors from lending money, thus affecting the overall growth of the economy.
Link: http://www.bloomberg.com/news/articles/2015-10-20/china-s-overheated-bond-market-showing-strain-for-local-bankers
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