China Muni Bonds Sold at Highest Premium Over Sovereign in 2015

  • Inner Mongolia auctions debt at yields 20 basis points higher
  • Worsening slowdown, tightening cash supply drive up yields

China’s Inner Mongolia region sold local-government bonds at at the highest premium over sovereign debt this year amid concern an economic slowdown is worsening and the cash supply is shrinking.

The northern autonomous region sold general and special notes 20 basis points higher than the five-day average for sovereign securities across four different tenors on Tuesday, according to statements posted on the website of China Central Depository & Clearing Co. That’s the widest premium since local authorities started this year’s municipal sales in May, data compiled by Bloomberg show.

Inner Mongolia, whose economy is dependent on livestock farming, coal and rare earths, is ranked the nation’s 14th riskiest region out of 31, according to a Bloomberg gauge. China’s gross domestic product will increase less than 7 percent this year for the first time since 2001, according to a Bloomberg survey, as stocks plunge and capital outflows increase. The central bank has stepped up cash injections to offset a tightening of liquidity due to intervention in the currency market to prop up the yuan.

“The economy is weak, and obviously the money market isn’t as loose as it was, so local-government bond premiums are widening,” said Li Qilin, a Beijing-based fixed-income analyst at Minsheng Securities Co. “We expect munis’ premiums to gradually normalize to 30-40 basis points, a reasonable range based on our estimates.”

Inner Mongolia issued three-, five-, seven-, and 10-year general and special bonds at 3.14 percent, 3.35 percent, 3.53 percent, and 3.52 percent, respectively, according to the statements. General bonds rely on fiscal revenue for repayments, while special notes are for projects that can generate some income.

Hubei province sold bonds at yields 10 basis points higher than sovereign paper on July 17. Since then, Anhui, Henan and Gansu have sold debt at the same premium, while Liaoning failed to sell any of the 10-year securities it offered on Aug. 7. Most muni sales in May and June were priced on par with central government notes.

Authorities in Beijing are encouraging regional administrations to convert more expensive debt into lower-yielding municipal notes. This year’s quota has been set at 3 trillion yuan ($471 billion), while an extra 600 billion yuan can be raised to fund infrastructure projects and 171.4 billion yuan of existing securities can be rolled over.

The yield on the sovereign securities due July 2025 rose one basis point to 3.36 percent as of 11:52 a.m. in Shanghai, according to data from the National Interbank Funding Center.

— With assistance by Helen Sun

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