China’s State Insurers Give ‘Thumbs Up’ to Party with 50-year Bond Buy

November 14, 2012

China’s state-owned insurers gave a vote of confidence in the ruling Communist Party as it winds up its five-yearly congress on Wednesday, taking the long view by snapping up a 50-year bond at a low rate.

Sovereign bond rates are traditionally seen as a sign of the market’s confidence in the stability of a country or ruling regime, with investors demanding a premium if they detect any sign that their money might not be safe.

In this case, the investors were state-owned insurers, and the auction took place as the party that hires and fires their CEOs held its 18th congress in Beijing, where China’s next generation of rulers will be unveiled.

China’s Ministry of Finance auctioned 26 billion yuan ($4.18 billion) of 50-year bonds in the interbank market at an average yield of 4.35 percent, exactly as traders had forecast, despite the fact that traders said there was little demand for such long-term debt.

“Fifty years is way too long. There’s almost no demand for this sort of bond,” said a trader at a major state-owned bank in Beijing.

The auction results are in line with previous finance ministry bond auctions, including one at the same time last year.

As a point of comparison, investors who bought 30-year finance ministry bonds currently enjoy indicative yields of 4.2330 percent. Adding another 20 years adds less than 12 basis points to the rate.

However, the yields were not extraordinarily low in the domestic context. They were in line with fixed interest 50-year sovereign debt in the interbank market, which returned 4.3106 percent on Tuesday.

Traders said that the fact that all the players involved are specialized state-controlled actors could explain the phenomenon.

A previous auction of 50-year bonds in May also came in within forecasts at a yield of 4.22 percent. Those bonds currently trade at 4.31 percent in the secondary market, according to China’s main bond clearinghouse.

Not all state-run bond auctions go smoothly, showing that even obedient financial institutions have their limits. For example, a 20 billion yuan [$3.21 billion] auction of long-term bonds by the troubled Ministry of Railways in July 2011 failed to attract enough interest, as investors worried about debt piled up by the ministry.

(Reporting by Pete Sweeney, Gabriel Wildau and Hongwei Li; Editing by Lucy Hornby and Nick Macfie)

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