Foreign institutions cut their holdings of Chinese government bonds sharply last month, the most on record. Overseas investors sold a net 35 billion yuan of Chinese government bonds in February, the largest monthly reduction on record and the first net reduction since March 2021, according to Chinese bond data. Holdings of Chinese government bonds by foreign institutions fell to 2.48 trillion yuan from 2.52 trillion yuan in January. The sharp pullback by foreign institutions has raised concerns in the market, with some speculating that some of the selling may have come from Russia, as U.S. and EU sanctions have frozen most of the Russian central bank's foreign exchange reserves, leading it to sell only gold or yuan reserves to get cash.
And Russian President Vladimir Putin has signed a decree that will repay securities denominated in other currencies in rubles. However, the $117 million worth of Russian bonds due March 16 do not have this provision. Therefore, if Russia decides to pay for these bonds in rubles, it could eventually lead to a default and trigger the terms of a credit default swap.
Credit default swaps providing five-year insurance for $10 million in Russian bonds were quoted Monday at about $5.8 million in advances and $100,000 in annual payments, implying a probability of default of about 80%, according to ICE data.
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