Investment funds have flowed rapidly into corporate bonds since the stock market collapsed in June, triggering a surge of debt issuance. Demand has compressed corporate and sovereign bond spreads to their narrowest in four years - an oddity, when industrial profits are falling and credit risks are rising.Chinese investors are playing musical chairs with excess liquidity. Liquidity races around trying to avoid destruction.
While bond investors say corporate bond prices are not at unreasonable levels, they are wary a sharp correction could be sparked by a bond default from major state-owned companies or a change in monetary policy.
"What concerns us is the narrowing credit spread between corporate bonds and government bonds, despite shrinking corporate profits," said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore. "In addition, we are also worried about the rising leverage ratio in bond positions."
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