10-Year Approaches Multi-Year High Despite China Fears

Risk-on surprise despite China uneasiness. The day started with tough news from China that seemed poised to drive a strong UST rally, but markets instead spent the day digesting recent U.S. inflation data and pricing in a higher-for-longer policy rate outlook. Treasuries seesawed intraday but yields and swap rates closed higher across the curve. The 2-year yield ended the day ~7bps higher at 4.97%, while the 10-year yield ended up ~4bps at 4.19% (within a few bps of a multi-year high). Equities picked up gains today, boosted by the best day for technology stocks in two weeks.

Large Chinese wealth manager misses payments. Clients of Zhongzhi Enterprise Group Co, a Chinese wealth manager with ~$140bn in assets, reported that the firm missed payments on certain investment products. The firm is part of the country’s shadow banking sector, which has faced heavy regulatory scrutiny since 2017. Recognizing the gravity of the situation, Chinese regulators announced a task force to examine risks at the firm. This news comes amidst broader concerns about the Chinese economy. One of China’s largest property developers, Country Garden Holdings Co, is nearing default while loan demand in China has fallen to the lowest level since 2009.

Crude prices decline on China fears. High oil prices were a key contributor to U.S. inflation figures this month, but a combination of Chinese economic fears and a stronger dollar are leading to softer prices. China is the world’s largest buyer of crude oil, so an economic slowdown will impact demand. In addition, if the U.S. dollar continues to strengthen, crude prices could continue to decline (most oil is priced in dollars). Intensified by seasonal illiquidity, crude oil benchmarks reacted negatively to today’s China news which ended a run of seven-straight weekly gains.