China's credit-market gauges are triggering alarm bells, as banks grow cautious in lending to each other while investors prefer the safest government bonds

China's credit-market gauges are triggering alarm bells, as banks grow cautious in lending to each other while investors prefer the safest government bonds. The spread between the two-year sovereign yield and the similar-maturity interest-rate swap, a gauge of financial stress, just reached 121 basis points, the widest in Bloomberg data going back to 2007. The cost to lock in the three-month Shanghai interbank offered rate for one year has reached an eight-month high of 94 basis points over similar contracts based on repurchase agreements. Billionaire investors George Soros and Bill Gross have drawn parallels between the situation in China now and that in the U.S. before the 2008 financial crisis, when traders gauged lending appetite by monitoring the difference between the LIBOR and the overnight indexed swap. Efforts to curb leverage in China need to be handled carefully to avoid wrecking confidence in the financial system. (VIEW LINK)