It's no secret that the yield on the 10-year US Treasury has been highly volatile since early November.
Mr Trump's victory and his likely inflationary policies pushed it towards its May highs of 4.50%, and then the resurgence of geopolitical tensions has given it a breath of fresh air, but volatility is certain to remain the order of the day.
So, US Treasuries are considered to be the safest and most liquid ‘risk-free’ investment, despite the loss of their AAA rating by two of the three main rating agencies.
In recent months, a new challenger, despite its lower rating of A+, has slipped in ahead of the United States: China.
Its debt is much less liquid, which remains a key factor, but it now pays less than that of the United States, much less.
The 1.25% China 2026 bond issued 5 years ago with a risk premium of +12 basis points has been trading with a negative premium since April.
On 11 November, China issued two new dollar-denominated bonds. It was aiming for a $2 billion issue, but obtained order books for... $40 billion!
The risk premium offered at the first was already low, but it melted further in the face of success: from 25-30 basis points to 1 and 3bp for 3- and 5-year maturities. The craze continued after the issue and on 20 November, the 5-year bond was trading at a premium of -32bp, never seen before.
By way of comparison, the premium on a dollar Canadian bond (AAA rating) with the same maturity is +3bp.
Beyond these impressive figures, there are other factors worth noting.
China has no specific funding needs in dollars, so why is it borrowing in this currency? One likely reason is to create a reference curve for local companies wishing to issue in dollars.
Chinese demand has been strong because these bonds offer them tax advantages.
But in addition to this expected local demand, there was another, slightly more surprising, demand from Saudi investors.
In May, the Chinese and Saudi finance ministers met and expressed the wish to strengthen their financial and economic collaboration. This was far from being a pious hope, as China chose to issue its bonds from Riyadh, thereby supporting Saudi Arabia in the development of its financial hub.
The dreams of supporters of de-dollarisation, who advocated the creation of petro-yuan in 2022, may not have materialised, but the two countries are continuing to develop their ties.
Finally, it should be noted that 12% of the 5-year maturity has been allocated to the Middle East (compared with 15% to Europe and 6% to the United States). Also in the3rd quarter, Chinese funds have sold $51bn of US Treasuries out of the $700bn they held.
Ties continue to grow closer between the Middle East and Chine, creating new balances to keep in mind.
