China’s 10 year just went lower than the 5 year.
Yet another sign (and this one is a screamer) that China may be the catalyst to the coming (and long overdue) global bust. Note that this has NEVER happened in China’s history.
In the US, this has happened 7 times. And each time led to a recession.
An inverted yield curve is when the longer-term bond yields are lower than shorter-term bond yields from the same entity (E.g., Sovereign Bonds). This situation is largely seen as a predictor of a recession.
This is a pretty rare occurrence. I mean, why would you tie your money up for a longer period at a lower yield? It doesn’t make financial sense. If I’m going commit money for a longer period, naturally, you want a higher rate of return. So what this is saying is that investors are showing little confidence in the economy, such that they want their money tied up for a longer term. The alternative is taking the shorter term and having to find another parking spot when the bond matures (and presumably the economy is weaker and that same bond would be yielding an even lower rate than today).
Also, it makes banks lending tighter. They won’t borrow short-term money to lend out long-term with an inverted yield curve. Look at the drop in M2:
A Ponzi scheme is a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.
It is said that US Social Security is a Ponzi scheme. Bernie Madoff was the biggest, most famous Ponzi scheme. Apparently, Chinese banks (including State-owned ones) are running Ponzi schemes.
Chinese banks are selling Wealth Management Products (WMP). These products offer ~5-8%+ of “guaranteed” returns. But these aren’t bonds. WMPs are something like the collateralized debt obligations (CDOs). Guess what took down Lehman? … CDOs. :/
Look where these things invest:
Madoff was a $65B Ponzi scheme. China WMP are at $9-Trillion. Markets are as inter-connected as they’ve ever been. Once there is a failure and people start to panic and pull money out of these things, it’s over.
Apparently though, the Chinese consumers feel like their money is safe (at least the principal). The Government will bail them out, if there are any problems (like FDIC insurance, in a way).
This is why Kyle Bass has been betting against the Yuan. His theory is that the Chinese Gov’t will have to drastically devalue the Yuan to save the system. Remember, many of these are State-owned banks investing in State-owned projects.
Read more at Jim Rickard’s Daily Reckoning blog.