What to expect from the credit market in 2024

(Ming Ming is the chief economist of CITIC Securities)

As 2023 draws away, the credit market has experienced a lot of extraordinary. 2024 has arrived, how to interpret credit spreads, and what are the expectations of credit bonds in different sectors. This article reviews the hot spots in the credit market in 2023 and reviews the spread performance of different credit sectors in December 2023, so as to look forward to the investment strategies of each credit sector in the future.

In the real estate sector, the maturity of central state-owned enterprises and local state-owned enterprises in 2024 will be larger, with 73.363 billion yuan and 104.263 billion yuan respectively, of which 24Q3 and 24Q4 will be the peak maturity of mixed real estate enterprises and private real estate enterprises, respectively. For some mixed and private real estate enterprises, the short-term maturity scale is large, and there is still the possibility of public opinion fluctuations. In terms of attributes, among the central and local state-owned real estate enterprises, the real estate enterprises with relatively weak cash and short-term debt have strong shareholder background or refinancing ability, have a certain regional importance, and are expected to obtain strong support from shareholders, and the possibility of credit risk transmission to state-owned enterprises is low;

▍How long can the urban investment market last under the interpretation of bonds?

Under the market mining market, as of December 25, 2023, the spread of AA-rated urban investment in some regions with greater debt pressure has reached a low level of less than 1% in the past three years, except for Inner Mongolia, Fujian, Guangdong, Shanghai and other places, the interest rate spread of AAA-rated urban investment in other regions is at the level of less than 40% in the past three years. For 2024, under the background of tightening regulatory policies for urban investment, "curbing increment" and "controlling stock" may limit the supply of urban investment bonds, and it is expected that the supply and demand pattern will be stronger than supply in the short term, and the continuity of the package of bond policies will become an important factor affecting the urban investment market.

▍What sectors of Chinese dollar bonds can obtain higher yields?

We review the returns of different types of Chinese dollar bonds in the context of the Fed's interest rate cuts in history, and explore the US dollar bond sector that may achieve higher yields in 2024. From December 2018 to the end of 2019, the Fed cut interest rates three times, with a total of 75bps, during which the yields of Chinese dollar bonds in different sectors varied. From December 2018 to the end of 2019, AT1, real estate dollar bonds, and high-yield urban investment dollar bonds all achieved returns of more than 10%, and the overall income of Chinese dollar bonds reached 12.38%. Looking ahead to 2024, against the backdrop of likely resilience in US inflation data, we believe that the Fed may start a rate cut cycle at the middle of the year, and AT1 and high-yield urban investment bonds may still achieve higher yields.

▍Can offshore RMB bonds become hot again?

Against the backdrop of high U.S. bond interest rates in 2023, the average coupon rate of newly issued offshore RMB is 3.46%, which is lower than that of Chinese dollar bonds of 4.72%, and the financing cost of offshore RMB bonds is low, making it a better choice for overseas financing channels for Chinese enterprises. From the perspective of the industry, the proportion of urban investment issuance has further increased compared with 2022, reaching 11.98% in 2023, the number of new urban investment offshore RMB bonds issued from January to May is relatively large, and the proportion of real estate issuance has increased marginally, reaching 4.56% in 2023. The yield of existing offshore RMB bonds is higher than that of onshore bonds, and the valuation yield of offshore RMB bonds issued by some issuers with similar maturity and similar remaining maturity is higher than that of onshore bonds, and the overall cost performance is higher.

▍How to interpret the spread of the bank's two permanent bonds

In the context of supply in 2024, we believe that it is difficult for the spread of bank second perpetual bonds in 2024 to recreate the extreme low level in September 2022, the upper and lower limits of the spread corridor may rise slightly on the basis of 2023, and the lower limit of the secondary bond spread corridor may be around 35bps, and the upper limit may be around 60bps. Since the peak of the supply and redemption of the second permanent bond is not completely consistent, and there are periodic fluctuations in net financing, the peak of the redemption of the second permanent bond in 2024 may drive the marginal decline of the net financing scale.

▍Where does the income of non-bank financial bonds come from?

Since the second half of 2023, the maturity scale of subordinated bonds of securities companies has increased marginally, and the first batch of insurance perpetual bonds has landed, driving the rapid growth of the issuance scale of non-bank financial subordinated bonds. Looking forward to 2024, the issuance scale of non-bank financial bonds may further increase as the market's acceptance of insurance perpetual bonds increases and the demand for insurance and securities firms to supplement capital increases. Different from the "trading attributes" of bank second perpetual bonds with good liquidity, except for insurance perpetual bonds, the turnover rate of other types of non-bank financial subordinated bonds in 2023 will be less than 150%, and the market liquidity is low, which is more suitable for allocation strategies. The overall yield of non-bank financial subordinated bonds is relatively high, and the allocation cost performance is good, among which the average yield of insurance non-perpetual subordinated bonds is at the highest level among the four types of non-bank financial subordinated bonds.

▍Whether the cost performance of coal and steel bonds has improved

For coal bonds, the logic of negative correlation between coal prices and coal bond spreads has failed in recent years. In the second half of 2023, the spread of coal bonds will gradually recover after the adjustment of the bond market, showing a downward trend. For steel bonds, looking forward to 2024, the three major projects, the continuous optimization of real estate policies, the increase in automobile sales and other factors are expected to drive the recovery of steel demand.

▍How to carry out the layout of private enterprise bonds

In the context of the continuous tightening of urban investment financing, the participation value of short-end private enterprise bonds is relatively high. There are still allocation opportunities in technology and other industries: for the real estate sector, under the background of weak repair of the industry, the opportunity for the valuation of leading real estate companies to fall and the opportunity for market confidence to pick up after the further implementation of incremental policies; for the manufacturing sector, compared with the overall private enterprise bonds, the credit spread of manufacturing private enterprise bonds is slightly lower, but the turnover rate is higher, indicating that its market liquidity is better and it is suitable for investment as a trading variety after sinking; for medicine, since 2018, the default rate of pharmaceutical private enterprise bonds has been low, and the credit risk has gradually convergedIn recent years, the mainland credit bond market has been innovating science and technology innovation debt instruments, and more technology-based private enterprises may be financing through science and technology innovation debt instruments in the future.

▍Whether the supply of green concept bonds can be increased

Since 2020, the issuance scale of green bonds under the Wind caliber has grown rapidly, with the annual issuance scale exceeding 700 billion yuan, and the issuance scale will exceed one trillion yuan for the first time in 2022. In 2023 (as of December 25), the total scale of green bond issuance will be 960.5 billion yuan, a decrease of 7.36% from 2022, of which the issuance scale of debt financing instruments will decrease more. For 2024, the dual carbon policy may continue to exert force, we believe that green bonds will become an important financing channel for low-carbon transformation and development, and the green bond market has good development prospects, and it is expected that the issuance scale in 2024 will be driven by financial bonds and asset-backed securities to maintain a high level.

▍How to choose credit duration

In 2024, the central bank still has room for monetary policy easing, and the interest rate pivot may show a downward trend, and we believe that the possibility of an extreme correction in credit spreads is low. Looking back at the bond bull period from March to October 2022 and January to April 2023, the medium- and long-term credit spreads have fallen even more, and the medium-term bond long-term bond wealth index has achieved higher returns than the medium- and short-term indexes, and the current 3Y and 5YAAA-rated credit spreads are at the historical level of more than 30%, and there is still some room for downside. In addition, you can pay attention to the income opportunities presented by riding strategies during the period of steepening interest rate curves.

▍December credit spread review: volatility under the policy game

Affected by factors such as the market game and the central bank's monetary policy, the important work conference in December, the performance of the credit bond market in December 2023 was mixed: in terms of maturity, short-end credit spreads widened significantly, and credit spreads with maturities of 3 years and above did not change much, while in terms of grades, the mid- and long-term credit spreads of AA+ and AA- grades narrowed, and the credit spreads of AAA+ and AA- grades widened overall. From December 1 to December 13, government bond interest rates fell and credit spreads passively widened, while from December 14 to December 25, government bond interest rates remained on a downward trend, and credit spreads showed a downward trend against the background of institutions tapping into income.

▍ Look at credit spreads by sector: spreads widened

Specifically, for urban investment bonds, the "urban investment fever" market in the credit market cooled slightly, so the spreads of short-end urban investment bonds rose in December, and the medium- and long-term urban investment bonds maintained a narrowing trend under the institutional duration behavior; For coal and steel bonds, the spread of bonds rose and fell, and the change range of interest rate spread was at a relatively small level among various credit categories; for bank second permanent bonds, the spread performance was differentiated, with the spread of medium and high-grade second permanent bonds slightly widening compared with the beginning of the month, and the middle and low grades showing a narrowing trend in the context of institutional sinking and mining income.

▍Investment strategy and market outlook

For urban investment bonds: In the short term, the core strategy of urban investment is still short-term sinking excess returns and capital gains, and for regions with less debt pressure, the long-term can be appropriately extended; On the other hand, with the trend of active integration, withdrawal from financing platforms and early payment of urban investment platforms at the district and county levels in the context of debt, the cost-effectiveness of their allocation has also emerged. For real estate bonds: If the further introduction of incremental sales policies and financing policies in the future will drive the fundamental data to continue to pick up, it may improve market expectations and promote the recovery of valuation yields. For coal and steel bonds: In the context of the expected recovery of aggregate demand, medium and long-term coal and steel bonds are more cost-effective, and the duration can be appropriately extended to increase income. For the bank's second permanent bonds: after the bond market adjustment is over, the secondary bonds of the state-owned stock bank will be more cost-effective. For urban and rural commercial banks, the perpetual bond market is more liquid, and the average valuation is higher, which has better investment value.

▍Risk factors:

The central bank's monetary policy exceeded expectations, the tightening of credit conditions caused by the tightening of financing policies, the decline in market risk appetite, and the impact of individual credit events on the market.

The views expressed in this article are solely those of the author.