Core ideas
Looking back at the just-concluded 2021, under the liquidity management of the central bank's pre-adjustment and fine-tuning, the bond market trend is generally stable. The new year is coming in January, although the previous RRR cut has released a large amount of long-term funds to the market, it is expected that the return of fiscal funds in January and the disturbance of the Spring Festival cash withdrawal will still produce a large liquidity gap, and the operation of the central bank has become the most critical variable this month. Recently similar to the beginning of 2021, the leverage level of the bond market is relatively high, and the disturbance of the capital side may be magnified, we recommend learning the lesson of the "money shortage" in early 2021 and being more cautious about the market.
How to view the supply of government debt: the pace of supply is expected to be pre-empted. In terms of treasury bonds, with reference to the issuance plan, it is expected that the supply will increase significantly in January, and the net financing amount may be about 700 billion yuan. In terms of local bonds, considering the pre-fiscal rhythm and the currently announced local bond law issuance plan, it is expected that the net financing of local bonds will reach 500 billion yuan in January. Overall, the net financing of government bonds in January may reach 700 billion yuan, which will cause a greater disturbance to the capital side.
How to look at fiscal revenue and expenditure: the pressure on the return of funds is relatively large. Public finance has a significant seasonal effect, and the income is often greater than the expenditure at the beginning of the quarter, and the fiscal surplus is surplus. Since the Ministry of Finance has begun to disclose the fiscal revenue and expenditure data for January and February since 2019, we can only simply calculate that the total fiscal revenue in The broad sense in January is expected to be about 3.4 trillion yuan, the total expenditure is 3 trillion yuan, and the difference between revenue and expenditure is about 400 billion yuan.
The central bank launched a 500 billion yuan MLF operation on December 15, and since then, the scale of reverse repurchase investment has been flexibly adjusted, and the attitude of caring for the stability of the capital surface is relatively clear. In January, the pressure of the expiration of the MLF is not large, and the central bank is likely to continue to maintain liquidity in a reasonable range in terms of reverse repurchase.
How to look at other factors: rising demand for cash, increased pressure on payment. Cash M0 in circulation has a strong seasonality. Referring to the "Spring Festival disturbance" and the call for "local New Year" in previous years, M0 is expected to increase by about 1.2 trillion yuan in January; similarly, referring to the same period in 2018-2021, it is expected that RMB deposits deducting non-bank interbank deposits will increase by 2.7 trillion yuan in January, and the corresponding statutory deposit reserve will increase by about 250 billion yuan.
Be vigilant against the risk of funds before the Spring Festival: in previous years, the capital surface before and after the Spring Festival as a whole showed a tight and then loose situation, the interest rate of funds in the early spring festival has risen, the fluctuations have increased, the interest rate of funds after the Spring Festival has dropped significantly, the fluctuations have decreased, if the monetary policy does not need to release a loose signal, the central bank will be more inclined to choose temporary liquidity tools, such as reverse repurchase to complete the liquidity arrangement before the Spring Festival. At present, because the RRR reduction has just landed, the possibility of implementing the RRR reduction again in a short period of time is relatively small, and the operation combination of the central bank OMO and MLF is more important, and the probability will maintain a positive trend, but the investment of funds may not be too high. Referring to the net investment contraction in 2021, it is expected that in the early 2022 context of the release of long-term funds through RRR cuts and the continuation of the "local New Year", the central bank's operation will not bring about a significant easing of the capital side.
After-market outlook: The liquidity gap in January may reach 2.6 trillion yuan (not considering the expiration of MLF and reverse repurchase), at a high level, the central bank's operational strength is the most critical variable, and the probability is to smooth out the fluctuations through OMO+MLF, but it is difficult to see a significant easing. At present, some investors are betting on the central bank to cut interest rates in January, but we believe the probability is not high. Considering that the current level of bond market plus leverage is still high, the impact of liquidity changes is expected to be magnified, and it is necessary to be wary of the risk of rising interest rates after the market's overly optimistic expectations are disappointed.
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Looking back at the just-concluded 2021, except for abnormal fluctuations at individual time points, the bond market trend is generally stable under the liquidity management of the central bank's pre-adjustment and fine-tuning. The new year is coming in January, although the previous RRR cut has released a large amount of long-term funds to the market, it is expected that the return of fiscal funds in January and the disturbance of the Spring Festival cash withdrawal will still produce a large liquidity gap, and the operation of the central bank has become the most critical variable this month. Recently similar to the beginning of 2021, the leverage level of the bond market is relatively high, and the disturbance of the capital side may be magnified, we recommend learning the lesson of the "money shortage" in early 2021 and being more cautious about the market.
Liquidity gap observation
Government Bonds: Supply cadence is expected to be pre-empted
Under the premise of the high probability of the fiscal rhythm this year, with reference to the treasury bond issuance plan and the local bond issuance plan announced by some provinces and cities, it is expected that the overall net financing of government bonds in January will be about 700 billion yuan, which will form a certain pressure on the capital side.
In terms of treasury bonds, with reference to the issuance plan, it is expected that the supply will increase significantly, and the net financing amount in January may be about 200 billion yuan. From a historical point of view, the net financing amount of government bonds in January is usually not too high, but the direction of fiscal initiative to stabilize growth at the beginning of 2022 is clearer, and it is expected that the amount of government bonds issued in January 2022 will increase compared with previous years. According to the issuance plan of treasury bonds in the first quarter of 2022, new 1-year and 5-year treasury bonds will be issued in January, and 2, 3, 7, 10 and 30-year treasury bonds will be issued; 3 discounted treasury bonds will be issued, of which 2 will have a maturity of 91 days and 1 will be 182 days. Assuming that the issuance of 1, 2, 3, 5, 7 and 10-year treasury bonds is 70 billion yuan, the issuance of 30-year long-term treasury bonds is 30 billion yuan, and the average issuance of discounted treasury bonds is 60 billion yuan, we expect the total issuance of treasury bonds in January to be about 630 billion yuan. Taking into account the total repayment of 439.1 billion yuan of national bonds, the net financing amount is expected to be 200 billion yuan.
In terms of local bonds, considering the pre-fiscal rhythm and the currently announced local bond law issuance plan, it is expected that the net financing of local bonds will reach 500 billion yuan in January. In the context of fiscal efforts to support steady growth, this year's local bonds will probably show the characteristics of "early issuance". In September 2021, the local government began to report the capital requirements for the special bond project in 2022, the layout time was as far as possible to the premise, as far as possible to reserve sufficient time for the locality, earlier and better to do the project reserve work, december 16, the vice minister of finance mentioned at the State Council policy briefing, the new special debt quota in 2022 has been issued, the total amount of 1.46 trillion yuan. As of December 31, 2021, Zhejiang, Jiangxi, Hebei and other places have issued a local bond issuance plan for January 2022 and the first quarter, according to the plan, the total amount of new local special bonds and general bonds in January is about 200 billion yuan, considering that most local governments, especially some issuing provinces such as Anhui and Guangdong, have not been announced, and the statistics are not comprehensive, so it is expected that the final net financing of local bonds can reach 500 billion yuan.
Fiscal revenue and expenditure: the pressure of capital repatriation is relatively large
At the beginning of the quarter, "income exceeds expenditure", and the difference between generalized fiscal revenue and expenditure in January is expected to be 400 billion yuan. Public finances have a significant seasonal effect, with revenues often outweighing expenditures at the beginning of the quarter. Since 2019, the Ministry of Finance has begun to combine the fiscal revenue and expenditure data for January and February, so we can only simply calculate that the fiscal revenue and expenditure in January is expected to account for about 60% of the total in the first two months. Assuming that public fiscal revenue and expenditure and government fund revenue and expenditure have continued to grow at a compound growth rate in the past two years, the calculation results show that the total amount of general fiscal revenue in January 2022 is about 3.4 trillion yuan, the total expenditure is 3 trillion yuan, and the difference between revenue and expenditure is about 400 billion yuan.
Considering the financing of government bonds, it is expected that government deposits will increase by 1.1 trillion yuan in January, which is significantly higher than the same period in previous years. From the perspective of seasonality, fiscal deposits in January tend to increase, and the magnitude is larger, and the growth of fiscal deposits in the same period of 2021 even reached 1170 billion yuan. Combined with the above analysis of revenue expenditure and government bond financing, the growth of government deposits in January may exceed 1 trillion yuan as in 2021, and more liquidity will be withdrawn from the market, specifically, including fiscal revenue and expenditure (expected to be 400 billion yuan) and net financing of government bonds (expected to be 700 billion yuan), resulting in a liquidity gap of about 1100 billion yuan.
Central bank operation: care for the stability of the capital surface
The central bank launched a 500 billion yuan MLF operation on December 15, and since then, the scale of reverse repurchase investment has been flexibly adjusted, and the attitude of caring for the stability of the capital surface is relatively clear. In December, the RRR reduction was 0.5 percentage points (excluding financial institutions that have implemented a 5% reserve requirement ratio) to release long-term funds of about 1.2 trillion yuan. On December 15, a total of 950 billion yuan of MLF expired, and the central bank carried out 500 billion yuan of MLF operations, which is equivalent to reducing the RRR to replace the expired 450 billion yuan of MLF. In January this year, 500 billion yuan of MLF expired (data as of December 31), with a high probability of equal sequel. In terms of reverse repurchase, the central bank has increased the amount of reverse repurchase in the face of cross-month pressure, and the attitude of caring for the capital side is more obvious, and it is expected that liquidity will continue to remain in a reasonable range in January.
Other factors: rising cash requirements and increased pressure on payment
Pre-holiday demand for M0 rose and pressure on payment increased. At the end of 2021, the volatility of foreign exchange accounting has increased, which has brought certain disturbances to liquidity, but the impact is weak compared with fiscal and other factors. Referring to the same period of previous years, it is expected that the change in January will be within 10 billion yuan. Cash M0 in circulation has a strong seasonality, especially before the Spring Festival, the surge in residents' demand for cash withdrawal will increase M0, reduce liquidity, and recover after the holiday. Referring to the "Spring Festival disturbance" in previous years and the call for "local New Year", M0 is expected to increase by about 1,200 billion yuan in January; similarly, referring to the same period in 2018-2021, RMB deposits deducting non-bank interbank deposits in January usually increased by 2.7 trillion yuan, assuming that the average statutory deposit reserve ratio is still 8.4%, then the statutory deposit reserve is expected to increase by about 250 billion yuan, widening the liquidity gap.
Be wary of capital risks before the Spring Festival
Review of pre-holiday capital and central bank operations
In previous years, before and after the Spring Festival, the overall capital surface showed a tight and then loose trend, the capital interest rate in the early Spring Festival had risen and the fluctuations increased, and the fund interest rate after the Spring Festival fell significantly and the fluctuation decreased. Judging from the 7-day pledge repurchase plus weighted rate, it basically showed a trend of pre-holiday recovery and post-holiday decline, especially in 2021, it once soared more than 4% before the holiday. Although the funding rate fluctuates up and down around the policy interest rate as a whole, it also clearly shows a more volatile trend before the holiday. After the Spring Festival, as cash begins to flow back to the bank, the capital level will be more stable, the liquidity environment will be more relaxed, and interest rates will also decline.
During the Spring Festival holiday, the demand for interbank funds across the festival is under greater pressure, and the central bank will carry out liquidity arrangements in advance based on the tone of the monetary policy of that year before the Spring Festival, but the operation is different. Since 2018, the central bank has mostly put long-term liquidity into the market through the operation of RRR reduction + MLF/TMLF, and at the same time carries out reverse repurchase operations in a timely manner to make up for short-term gaps, but the specific implementation will still be combined with the market environment at that time and the policy tone to make flexible adjustments. In 2019, the monetary policy is biased towards easing, and the central bank has long begun to provide reverse repurchase funds with a term that can cross the festival; at the beginning of 2021, it was more cautious, did not take the RRR reduction tool, and mainly adjusted liquidity through reverse repurchase, the reasons behind it include: (1) After the Yongmei incident in November 2020, the central bank has renewed the MLF for two consecutive months, and the remaining funds are directly used to hedge the pre-holiday liquidity shortage; (2) Second, under the call of "local New Year", the interbank liquidity pressure is reduced compared with the same period in previous years.
We have extracted some commonalities from the operation of the central bank: (1) Regardless of whether the tone of monetary policy is loose or tight, the net liquidity of the central bank before the Spring Festival is obvious, so there will be a large amount of liquidity before the Spring Festival of the central bank and a large amount of liquidity after the Spring Festival. (2) MLF and 14-day reverse repo operations will basically not be absent. (3) If monetary policy does not need to release easing signals, the central bank is more inclined to choose temporary liquidity delivery tools, such as reverse repurchase to complete the liquidity arrangement before the Spring Festival.
Central bank operations in January will be the most critical variable
At present, because the RRR cut has just landed, the possibility of implementing the RRR reduction again in a short period of time is relatively small, and the combination of central bank OMO and MLF operations is more important. On December 25, the central bank held the fourth quarter regular meeting to deploy the arrangement: "We must be steady, steady and progressive, increase cross-cyclical adjustment, and combine with counter-cyclical adjustment... Keep liquidity reasonably abundant.". It is expected that the central bank will accurately carry out operations in combination with market changes, iron out liquidity disturbance factors in a timely manner, and make the delivery more accurate and effective. According to the previous estimates, the liquidity gap pressure in January this year is relatively large, it is expected that the central bank will carry out liquidity investment according to the liquidity gap, OMO and MLF operations will most likely maintain a positive trend, but the investment of funds may not be too high. Referring to the net investment contraction in January 2021, it is expected that in January 2022, in the context of the release of long-term funds through RRR cuts and the continuation of the "local New Year", the central bank's operations may not bring about a significant easing of the capital side.
At present, the market is betting on interest rate cuts, but the probability of the central bank cutting OMO and MLF interest rates is low, and it is necessary to be wary of the failure of monetary policy easing expectations. From the perspective of repurchase volume, the leverage ratio of the bond market has remained at a high level recently, reflecting the optimism of market sentiment, in part from the expectation that many investors are still worried that the economic growth rate will not rebound quickly, so they began to bet on the central bank to cut interest rates, expecting the currency to continue to be loose. However, interest rate cuts mainly support real economy financing by changing the cost of liabilities of commercial banks, so the credit delivery of commercial banks will be the main influencing factor of whether the central bank will cut interest rates. However, January is often the "credit month" of the year, considering factors such as project reserves, the probability of the central bank implementing interest rate cuts under the "opening red" effect is not high, and once the easing expectations are disappointed, the capital side may face greater challenges, and it is necessary to be vigilant against the "money shortage" situation in early 2021.
Aftermarket outlook
The liquidity gap in January may reach 2.6 trillion yuan (not considering the expiration of MLF and reverse repurchase), the central bank's operational strength is the most critical variable, the probability of smoothing out fluctuations through OMO+MLF, but it is difficult to see a sharp easing, we need to be wary of the market's overly optimistic expectations after the failure, bringing interest rate upside risks. (1) The pace of government bond issuance is in advance, and the overall net financing scale may reach 700 billion yuan; (2) with reference to the growth rate of public finance and government fund revenue and expenditure in previous years, it is expected that the difference between revenue and expenditure in the broad fiscal aspect in January will be 400 billion yuan; (3) the cash changes in circulation will have a greater impact on the liquidity gap, with reference to the situation before the holiday in previous years. It is expected that there will be a gap of about 1.2 trillion yuan in January; (4) IT is expected that RMB deposits excluding non-banking will increase by 2.7 trillion yuan in January, assuming that the average statutory reserve requirement ratio is 8.4%, then the increase in legal reserves will bring about a liquidity gap of 250 billion yuan. In summary, completely excluding the factors of MLF and reverse repurchase expiration, there is a large gap in liquidity, the central bank's operational strength is the most critical variable, and the high probability is to iron out the fluctuations through OMO+MLF, but it is difficult to see a large relaxation. At present, some investors are betting on the central bank to cut interest rates in January, but we believe the probability is not high. Considering that the current level of bond market plus leverage is still high, the impact of liquidity changes will also be amplified, and it is necessary to be wary of the risk of interest rates rising after the market's overly optimistic expectations are disappointed.
This article originated from the Ming Bonds research team