"I was going to wait until the 10-year TREASURy yield rebounded to 2.2% and then bottomed out, but the market didn't give it a chance at all, I didn't expect to reach 1.5% directly, and the yield may still be lower (bond prices are rising)." An American macro trader lamented to reporters.
So far, strong buying has caused the US 10-year Treasury yield to fall to 1.566%, which was still 3.25% in October last year. This week, the US 2-year and 10-year Treasury yield curves inverted for the first time since 2007, and recession panic pervaded the market. Looking across the ocean to China, although the situation is not so extreme, the yield on China's 10-year Treasury bond once hit 3% this week, down 1 percentage point from the 4% high in early 2018. However, the current US-China spread is still widening to 150 bp (basis point), higher than the historical average of 70 to 120 bp.
A number of Chinese and AMERICAN institutions interviewed by the first financial reporter generally believe that the inversion of the United States is not too different from usual, "The next 12 to 18 months are not expected to fall into recession, even if tariffs increase." It's just that the huge allocation needs of global institutions will continue to depress US Treasury yields. Andrew Catalan, head of U.S. long-term investment strategy at Mellon Investment Management in New York, told reporters. Former Fed Chairman Alan Greenspan even said he would not be surprised even if U.S. Treasury yields turned negative.
In view of the fact that the Sino-US interest rate differential still has room to narrow and China's inflation tends to decline, China's treasury bond yields still have room to go down, "It is expected that the low point of China's 10-year treasury bond will be at least 2.5% (within 1 to 2 years), lower than 2.6% in 2016, after all, the monetary policy situation is wider than in 2016, the economy is weakening, and the PPI has entered a negative range." Wu Zhaoyin, director of macro strategy of AVIC Trust, told reporters. Still, traders are struggling, "Unlike U.S. Treasuries, which have been snapped up by global buyers, the appeal could be reduced once Chinese Treasury yields fall to around 2.8 percent." ”
On August 15, the overseas "inverted" trend boosted the strengthening of China's treasury bond period and spot again, but then the central bank's parity increase on medium-term lending facilities (MLF) continued, superimposed profit plates poured out, and spot bond futures turned down.
There is still room for downside in China's bond yields
Earlier, domestic bond fund managers were still worried about the trend of interest rate bonds. On the one hand, the People's Bank of China has no intention of easing significantly, on the other hand, in July, the market was still waiting for the Fed to cut interest rates at the end of the month, and China's June economic data exceeded expectations, but all walks of life expected that the follow-up data would still fall, which led to institutions not daring to easily increase their positions.
"At that time, the trading session hoped to make a profit, but the allocation plate had not yet entered the market, the bilateral stalemate could not be stopped, and the interest rate bond once (July) only fluctuated by 1 to 2bp per day, but after the Fed cut interest rates landed, the 10-year Treasury yield will still fluctuate to 3%." Lou Chao, fund manager of UBS Asset Management Bond, previously told the first financial reporter.
As the situation becomes clearer, the yield on China's 10-year Treasury bond recently hit 3% at one point this week. "We expect that while the PBOC will cut the MLF rate in the third quarter, China will not join the wave of monetary easing... However, as PPI declines, China's long-term interest rates may catch up with U.S. Treasuries, especially now that U.S. Treasuries seem to be stagnant around 1.6% to 1.75%. Eric Robertsen, Head of Global Macro Strategy at Standard Chartered, told reporters.
Wu Zhaoyin mentioned to reporters that the current economic data and inflation prospects have helped the yield of government bonds to decline. In terms of economic data, the added value of industries above designated size increased by 4.8% year-on-year in July, 5.8% lower than market expectations. At the same time, the industrial added value in July increased by only 0.19% month-on-month, which was less than 3% per annum, which also hit a new low for many years. Industrial added value has a strong correlation with power generation data, and it is currently speculated that the industrial added value data in August may still be low according to the coal consumption data of power plants for more than ten days in the first ten days of August.
From the price data, although the CPI reached 2.8% year-on-year in July, it is almost certain that this is the high point of the year, and in the next few months, as the tail factor declines, the year-on-year increase in CPI will fall to around 2%. Wu Zhaoyin told reporters that it is more noteworthy that the PPI is -0.3% year-on-year, which is the return to negative value again since september 2016, when the PPI turned positive year-on-year, and according to historical laws, the negative value range may continue for a long period of time (at least 1 to 2 years). Judging from the current crude oil prices and the price trend of the black industry chain (coal, steel, iron ore, coke, etc.), the year-on-year growth rate of PPI may still be further lower, which may drive the CPI downward, and then the interest rate level of the market will tend to decline, which in turn will promote bond prices. ”
At the same time, China's monetary environment is still relatively loose, and the overall interest rate level is still high, "the same 10-year Treasury yield, China is still 130bp higher than the United States, which also indicates that China's overall bond yield has a large downside." Wu Zhaoyin said. Higher yields have also attracted foreign capital, and by the end of July this year, the cumulative holdings of Chinese bonds by foreign institutions had exceeded the 2 trillion yuan mark.
Easier said than done when trading is hard
Despite the long-term downward trend, recent interest rate bond trading has not been so simple for traders or fund managers with positions.
"The downward trend in U.S. Treasury yields is not tangled, but China may still be consolidating around 3%, and this entanglement needs to be broken by two factors, one is to cut interest rates at the short end, and the other is to need economic data that is worse than expected." A British-based Chinese bond fund manager told reporters, "From the perspective of attracting capital, in fact, it can't fall too fast." The 3% Treasury yield, combined with stable interest rates, will continue to attract foreign investment. ”
At present, there is another worry - "really down to 2.8%, if the main force of large shipments, foreign capital may not have such a large carrying capacity and power." A trader at a foreign bank told reporters.
He also said that the current 2.8% may be a major turning point, and it is more inclined to sell at this point, "Although the recent Government bond yield is declining, but the Government bond futures have not continued to reach new highs, which shows that it is still a tangled market." If a series of recent external storms can be calmed, then yields may pick up, after all, China's policy space is still very large and does not need large-scale easing. ”
"Inversion" does not mean that the United States will decline immediately
At present, China's 2-year Treasury yield is around 2.65%, and the agency does not think that China will have an inverted 2-year and 10-year yield curve, "which has never happened." In addition, US debt is a global investment target, Japan, Europe are mostly negative interest rates, so the institutional buying order is very large, but the global buyer power in China is relatively limited. The above-mentioned trader mentioned.
Of course, Chinese institutions are also paying close attention to the evolution of the US bond market, after all, the recent global focus has been on whether the inversion of the US Treasury yield curve indicates a recession?
Unlike what public opinion hypes, institutions still agree – recession is exaggerated.
The reason why the long-end US Treasury yield has fallen by more than 150bp in one year is mainly driven by two major drivers. Kataran told reporters that the first is that a large number of foreign buyers demand has depressed the yield of long-end government bonds. "In Europe, for example, there is not a single term of German debt that is not negative. There is also Ireland, where the yield on 10-year government bonds is negative (up to 11% in 2011). Now that the 10-year Treasury yield (nearly 1.6%) is almost invincible, overseas buyers are pouring into U.S. long-end bonds, and earlier QE (QE is mostly buying long-end bonds) has also led to an increasing scarcity of long-term bonds. ”
Speaking about the second driver, he said investors were worried that the Fed was "lagging behind the market" and defensively added long-end bonds. "As trade frictions persist, investors believe the Fed should take more forward-looking steps to prevent the economic downturn, and although the central bank is not overly tight at present (the Fed caused a recession due to interest rate hikes too quickly in the early years), it is believed that the Fed has not done enough to reverse the decline in the US economy in the context of the global economic downturn."
However, institutions generally believe that the US economy will fall into recession in the next 12 to 18 months. Former Fed Chair Janet Yellen recently said that the United States is unlikely to fall into recession, "in the past this [yield curve] was a very good recession signal... But in the current situation, this may be a less good signal, because in addition to the market's expectations for the future path of interest rates, there are many other factors that are driving down long-end yields. Greenspan even believes that it is no big deal that the US Treasury yields really become negative, "There is international arbitrage in the bond market, which helps to depress long-term US Treasury yields." ”