On 5th November China issued $4 billion worth of US dollar (USD)-denominated bonds split across two equal tranches. The orderbook was $161 billion at one point, but ended near $118 billion when final pricing was announced. The 3-year $2 billion tranche priced at US Treasury + 0bp (aka flat to UST) and the 5-year $2 billion tranche priced at US Treasury +2bp. The following morning, bonds traded up significantly and were quoted more than 30bp inside UST (specifically: China 28s -33.5bp | China 30s -37.5bp).

This is unusual. Looking at other high-credit quality sovereign issuers in US Dollar, South Korea 30s (AA-rated) trade at T+5bp, Abu Dhabi 30s (AA-rated) trade at T+10bp, or Qatar 30s (AA-rated) trade T+18bp. China is A+ rated so, on paper, its creditworthiness is assessed as weaker than South Korea or Qatar, and in this case AA-rated USA. So, what’s so special about China? “Has it become the new risk-free rate” asked one of my colleagues?

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