China’s credit-market gauges are triggering alarm bells, as banks grow cautious in lending to each other while investors prefer the safest government bonds.
The spread between the two-year sovereign yield and the similar-maturity interest-rate swap, a gauge of financial stress, reached 121 basis points on Feb. 19, the widest in Bloomberg data going back to 2007. Two days later, the cost to lock in the three-month Shanghai interbank offered rate for one year reached an eight-month high of 94 basis points over similar contracts based on repurchase agreements, which are considered safer because they involve government securities as collateral.
Billionaire investors George Soros and Bill Gross have drawn parallels between the situation in China now and that in the U.S. before the 2008 financial crisis, when traders gauged lending appetite by monitoring the difference between the London Interbank Borrowing Rate and the overnight indexed swap. Premier Li Keqiang’sefforts to curb leverage in the world’s second-largest economy by driving up borrowing costs need to be handled carefully to avoid wrecking confidence in the financial system, according to Nomura Holdings Inc.
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