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1/9
Very interesting article: China-based high-yield funds have rushed in to buy bonds of troubled Chinese state-owned enterprises on the back of a sharp sell-off caused by the default last week of a Henan coal-mining SOE. https://www.ft.com/content/4ab1ffea-1f97-4dee-a938-0a825a025ef1
Very interesting article: China-based high-yield funds have rushed in to buy bonds of troubled Chinese state-owned enterprises on the back of a sharp sell-off caused by the default last week of a Henan coal-mining SOE. https://www.ft.com/content/4ab1ffea-1f97-4dee-a938-0a825a025ef1
2/9
Their buying, however, has almost nothing to do with credit analyses and is little more than a highly-speculative, binomial bet on whether or not the government will step in, as they have in the past, and restructure liabilities in a way that resolves the default.
Their buying, however, has almost nothing to do with credit analyses and is little more than a highly-speculative, binomial bet on whether or not the government will step in, as they have in the past, and restructure liabilities in a way that resolves the default.
3/9
Basically these funds are betting that, once again, the regulators will be so frightened by the short-term impact of allowing a default that they back away and arrange a bailout. One fund manager cited in this article makes no bones about the strategy: “The central...
Basically these funds are betting that, once again, the regulators will be so frightened by the short-term impact of allowing a default that they back away and arrange a bailout. One fund manager cited in this article makes no bones about the strategy: “The central...
4/9
government won’t allow the situation to deteriorate as that could lead to systemic risks.”
He adds: “If they let Yongcheng or Brilliance go under, no state firms in Henan or Liaoning will ever be able to tap the bond market again. The government won’t let that happen.”
government won’t allow the situation to deteriorate as that could lead to systemic risks.”
He adds: “If they let Yongcheng or Brilliance go under, no state firms in Henan or Liaoning will ever be able to tap the bond market again. The government won’t let that happen.”
5/9
I spent much of my career trading developing-country bonds, and I've seen many versions of this game before. This really isn’t an investment “strategy”. It is nothing more than a very simple bet that the regulators still have enough firepower to prevent defaults, and that...
I spent much of my career trading developing-country bonds, and I've seen many versions of this game before. This really isn’t an investment “strategy”. It is nothing more than a very simple bet that the regulators still have enough firepower to prevent defaults, and that...
6/9
they think the short-term costs of allowing defaults still exceed the long-term benefits. Until the regulators decide that they cannot keep kicking the can down the road, a strategy of buying bad news will always be profitable, after which the...
they think the short-term costs of allowing defaults still exceed the long-term benefits. Until the regulators decide that they cannot keep kicking the can down the road, a strategy of buying bad news will always be profitable, after which the...
7/9
strategy will always blow up.
This is just Russian roulette, in other words: you’ll probably win any given round, and every time you win you will be more convinced than ever that the odds are in your favor, but they aren’t. This “strategy” always ends the same way.
strategy will always blow up.
This is just Russian roulette, in other words: you’ll probably win any given round, and every time you win you will be more convinced than ever that the odds are in your favor, but they aren’t. This “strategy” always ends the same way.
8/9
The irony here is that longer the game goes on, and the more investors play this game, the more they undermine the long-term ability of the market to act as an efficient allocator of capital, and the more costly they make it for the regulator to keep preventing defaults.
The irony here is that longer the game goes on, and the more investors play this game, the more they undermine the long-term ability of the market to act as an efficient allocator of capital, and the more costly they make it for the regulator to keep preventing defaults.
9/9
Once regulators believe that long-term costs of keeping the game going exceed short-term cost of allowing real defaults, or once too-high debt levels reduce their ability to kick the can further down the road, they will bite the bullet and allow the defaults to take place.
Once regulators believe that long-term costs of keeping the game going exceed short-term cost of allowing real defaults, or once too-high debt levels reduce their ability to kick the can further down the road, they will bite the bullet and allow the defaults to take place.
