The good news - thanks to the largest liquidity injection in almost six months, yields on China's sovereign bonds have fallen - the biggest drop since Dec. 29, to 3.50 percent, while the one-year dropped four basis points to 3.57 percent. .

“The People’s Bank of China’s liquidity injections are showing its intention to protect the market at this sensitive period of time,” said Sun Binbin, a Shanghai-based analyst at Tianfeng Securities Co.

Notably this is the largest liquidity injection for this time of year in Chinese history (noteworthy since spikes in liquidity occur at regular intervals around quarter-end and lunar new year).

The bad news - as yields have fallen, the curve has collapsed to its most inverted ever... flashing warning signals for growth as loud as they have ever been.

Of course, if Fed's Dudley is to be believed today, a flattening yield curve is not a negative signal for the economy... apart from the seven out of seven times it has occurred since the late 60s, perfectly predicting recession of course.

Furthermore, as RBC's Charlie McElligott notes China's tightening financial conditions (higher short-term rates in the chart below) have crushed not just the yield curve, but global commodities...

Lenders have become increasingly reliant on wholesale funding and central bank loans this year, analysts at China Minsheng Banking Corp.’s research institute wrote,“major banks don’t have much extra funds, as is shown by the excess reserve data,”

As The Wall Street Journal previously reported, an inverted yield curve defies common understanding that bonds requiring a longer commitment should compensate investors with a higher return. It usually reflects investor pessimism about a country’s long-term growth and inflation prospects.

“But the curve inversion we are seeing right now is one with Chinese characteristics and it’s different from the previous one in the U.S.,” said Deng Haiqing, chief economist at JZ Securities.

The current anomaly in the Chinese bond market is partly the result of mild inflation and expectations of a slowing economy, Mr. Deng said. “At the same time, short-term interest rates will likely stay elevated because the authorities will keep borrowing costs high so as to facilitate the deleveraging campaign,” he said.

Notably, it appears officials are concerned at the potential for fallout from this crisis situation.

In an article published Saturday, the central bank’s flagship newspaper, Financial News, said that the severe credit crunch four years ago won’t repeat itself this month because the central bank will keep liquidity conditions “not too loose but also not too tight.”

Chinese financial markets tend to be particularly jittery come June due to a seasonal surge of cash demand arising from corporate-tax payments and banks’ need to meet regulatory requirements on capital.

On Sunday, the official Xinhua News Agency ran a similar commentary that sought to stabilize markets expectations. “Don’t panic,” it urged investors.

Sounds like exactly the time to 'panic'.