Interest rate, capital side
Since December last year, the bond market has performed strongly, with the 10-year treasury bond interest rate falling by about 40bp, while the fund price is relatively stable, and the DR007 monthly pivot is running in the range of 1.8%-1.9%, and the bond market trend diverges from the capital trend. What is the cause of this divergence, and how is it deduced?
What are the factors influencing the divergence between the bond market and the bond market? Bond market sentiment, interest rate cut expectations, interest rate differentials between China and the United States, and exchange rate pressure are important factors that trigger the divergence between the bond market and the bond market. In terms of bond market sentiment, the volatility of 10-year Treasury bonds contains more market sentiment, when the bond market sentiment is high, the 10-year Treasury bond interest rate will be higher than DR007 downside; In terms of exchange rate pressure, when the RMB spot exchange rate deviates upwards from the mid-parity, the fund price tends to rise or stabilize, but the 10-year treasury bond interest rate may be affected by other factors, tending to decline or rise to a lesser extent than DR007.
How will the divergence between the bond market and the capital side be interpreted in the future? Judging from the current situation, the interest rate differential between China and the United States is at a high level. The pressure to stabilize the exchange rate is greater, the Federal Reserve is expected to weaken the interest rate cut background, the above factors do not see signs of change at present, bond market sentiment and interest rate cut expectations may be the key to the follow-up game, of which fundamentals and government bond supply is a more obvious factor that may disturb the bond market and capital in the near future, if the economy continues to repair or will hit the expectation of interest rate cuts, the impact on the supply of government bonds is larger, the bond market sentiment or some fall, otherwise the divergence will still exist. Historically, the divergence has typically converged through a rise in the 10-year Treasury rate and a downward trend in DR007, with probabilities of 66% and 33%, respectively.
What is the impact of supply shocks on the bond market? According to our estimation of the scale of institutional bond allocation exposure and the net supply of government bonds, in the case of small supply pressure, institutional bond allocation exposure is greater than the net supply of government bonds, and the underallocation pressure is still there, and the DR007 pivot is difficult to decline due to the impact of stable exchange rates, while the 10-year treasury bond is strong, and the divergence between the two may continue to deepen; in the neutral case, the institution's bond allocation exposure can basically cover the net supply scale of government bonds, DR007 may have an upward momentum due to the influence of bank fund allocation, the bond market underallocation pressure will decline, and the 10-year treasury bond interest rate may be at 2.2%-2.35% range tends to run towards the upper limit of the band, the divergence between the two is expected to converge to a certain extent; in the case of large supply pressure, the market may have a large funding gap, DR007 and 10-year treasury bond interest rates may rise, the increase depends on whether the central bank through increased open market operations or RRR reduction to release liquidity, 10-year treasury bonds may touch 2.40%, the divergence between the two is also expected to converge.
Last week's liquidity: from April 15 to April 19, the net injection of open market operations was -72 billion yuan, the average value of R007 was 1.92%, which was 12bp higher than the 7-day reverse repo rate, the average interest rate of the 1-year joint-stock bank NCD was 2.09%, which was 41bp lower than the 1-year MLF interest rate, and the average proportion of overnight repo was 88.65%, below the warning line of 90%, and the net financing of credit bonds was positive.
Central Bank Operations and Market Prospects: This week, 10 billion yuan of reverse repurchase is due, 70 billion yuan of treasury cash fixed deposit is due, and 820.3 billion yuan of NCD is due. This week, 1 treasury bond is planned to be issued, with an issuance amount of 125 billion yuan and a net financing amount of -232.720 billion yuan, a decrease of 350.533 billion yuan from last week. This week, 22 local bonds are planned to be issued, with an issuance amount of 72.477 billion yuan and a net financing amount of 37.452 billion yuan, a decrease of 795 million yuan from last week. This week, the government and financial bonds plan to issue 3, with an issuance amount of 20 billion yuan and a net financing amount of 6.880 billion yuan, a decrease of 149.120 billion yuan from last week.
Since December last year, the bond market has performed strongly, with the 10-year treasury bond interest rate falling by about 40bp, while the fund price is relatively stable, and the DR007 monthly pivot is running in the range of 1.8%-1.9%, and the trend of the capital side deviates from the trend of the bond market. What is the cause of this divergence, and how is it deduced?
First, the capital side and the bond market trend diverge
Since December last year (as of 2024/4/19), the bond market has strengthened rapidly, and the 10-year treasury bond interest rate has fallen from 2.66% at the beginning of the year to the current 2.25%, but the fluctuation range of fund prices is small, and the DR007 monthly pivot has maintained a range of 1.8%-1.9%, and the trend of the capital side and the trend of the bond market diverge.
From the perspective of the bond market, from December last year to the beginning of this year, the economic fundamentals were in the process of gradual repair, real estate sales and investment were weak, the fiscal policy was moderate, the deposit interest rate fell rapidly, the market was expected to ease money, and funds and other transaction-oriented institutions actively participated in the bond market; the credit scale of commercial banks fell by 1.14 trillion yuan compared with the same period last year, and the premium income of insurance companies increased compared with the same period last year, but the progress of government bond issuance in the first quarter of this year was slower than that of the same period last year, and the net financing scale of government bonds decreased by about 470 billion yuan compared with the same period last year, and the market underallocation pressure was greater; at the same time, the stock market was not good before the Spring Festival, and the market risk aversion sentiment was strong。 These factors have contributed to the rapid and sharp decline of the 10-year Treasury bond. As for the capital market, the credit scale of commercial banks declined in the first quarter, and the trillion new treasury bond funds issued at the end of last year were implemented into the project, and the central bank invested 500 billion yuan PSL and cut the reserve requirement by 0.5 percentage points to release trillions of funds, and the funds were relatively abundant, but the central bank's demand for stabilizing the exchange rate was strong and the demand for air defense was superimposed, and the DR007 center remained stable in the range of 1.8%-1.9%. On the whole, the central bank has a strong ability to regulate short-term funds, while a weak ability to regulate and control the long-end bond market, which makes the trend of capital prices deviate from the trend of 10-year treasury bonds under the influence of the above factors.
2. What are the reasons for the divergence between the capital side and the bond market?
Theoretically, the factors affecting the capital market and the bond market are not exactly the same, the capital market has a relatively short term, is more constrained by the scale of capital and financial investment of large banks, and the central bank has a strong ability to regulate and control the capital market; there are many influencing factors in the bond market, and the capital side is only one of the factors affecting the bond market, and the long-term bonds reflect the market's expectations for monetary policy and macroeconomy. When the capital market and the bond market are affected by different factors, the trend can diverge. We observe the degree of deviation between the bond market and the capital side based on the 12-month regression of the monthly average of the 10-year Treasury bond interest rate and the monthly average of DR007 since 2015 (actual value-fitted value, hereinafter referred to as the "residual"). Looking at the trend of residuals, the residuals have been negative since December last year and are approaching the lowest level since 2015, reflecting that the 10-year Treasury interest rate is stronger than DR007.
Since 2015, the residuals have been in negative territory for several time periods. We find that bond market sentiment, interest rate cut expectations, interest rate differentials between China and the United States, and exchange rate pressures are important factors that trigger the divergence between the capital side and the bond market. Specifically, in terms of bond market sentiment, compared with DR007, the volatility of 10-year treasury bonds contains more market sentiment, and the residuals have a more obvious negative correlation with the bond market sentiment index [1] constructed by us, and the negative lows of many residuals correspond to the stage highs of the bond market sentiment index, which means that when the bond market sentiment is high, the 10-year treasury bond interest rate will be higher than that of DR007. In terms of interest rate cut expectations, we find that the residuals tend to be in the negative range from the early stage of MLF and LPY5Y interest rate cuts to the time of interest rate cuts, and the impact of MLF interest rate cut expectations is greater, which is reflected in the fact that the 10-year treasury bond interest rate changes are more advanced and sufficient when the interest rate cut expectations are stronger. In terms of interest rate differentials between China and the United States, we take the interest rate differential between 1-year U.S. bonds and 1-year U.S. bonds as the interest rate differential between China and the United States, and when the interest rate differential between China and the United States is at a high level (the second half of 2018 and the first half of 2019, and the second half of 2022 to the present), the residuals are basically in the negative range, reflecting that when the monetary policies of China and the United States diverge (the existing situation is that the United States raises interest rates, and the mainland policy interest rate does not move or cuts), the 10-year Treasury bond interest rate will be more than DR007 downward. In terms of exchange rate pressure, we use the difference between the USD/RMB spot exchange rate and the central parity as a signal of exchange rate depreciation pressure, when the difference between the USD/RMB spot exchange rate and the central parity increases significantly (August-September 2019, January 2020, October 2022, August-October 2023, From January 2024 to the present), the residuals are all in the negative range, reflecting that when there is depreciation pressure on the exchange rate, the fund price tends to rise or stabilize, but the 10-year treasury bond interest rate may be affected by other factors, tends to decline or rise less than DR007.
3. How to interpret the divergence between the capital side and the bond market?
Historically, after the 10-year treasury bond interest rate diverges from DR007 and the residuals are negative, the divergence usually converges through two ways: the 10-year treasury bond interest rate rises and DR007 falls, with the probability of occurrence being 66% and 33% respectively.
Judging from the current situation, the interest rate differential between China and the United States is at a high level, the pressure to stabilize the exchange rate is greater, and the Fed is expected to cut interest rates in the context of weakening, the above factors do not see signs of change at present, and the bond market sentiment and interest rate cut expectations may be the key to the follow-up game, among which the fundamentals and government bond supply are more obvious factors that may disturb the bond market and capital in the near future.
In terms of economic fundamentals, the month-on-month momentum indicator [2] we constructed has bottomed out since December last year, diverging from the bond market, and we are concerned about the possibility of convergence between the two.
On the supply side of government bonds, can the supply shock bring about a phased rise in capital prices and bond market interest rates in the short term?
In the first quarter of 2022 and 2023, the scale of commercial bank bond investment accounted for about 16.5% of the total scale of net financing and new deposits of commercial bank bonds, and the proportion was 13.6% in the first quarter of this year. We assume that the net financing scale of commercial bank bonds in the second quarter is 560 billion yuan since 2019, and the new deposits and new loans in the second quarter are 32% and 33% lower than the first quarter respectively (the median of the month-on-month decline since 2019), and the total scale of new loans and bond investment accounts for 90% of the total net financing and new deposits of commercial banks Based on this, it is estimated that the bond allocation exposure of commercial banks in the second quarter was about 1.05 trillion yuan, and the overall bond allocation exposure of commercial banks was about 1.41 trillion yuan.
From the perspective of insurance companies, we assume that the premium income in March this year will increase by 50% compared with February (about the growth rate since 2019, excluding 2020), the total premium income in the first quarter will be about 2.19 trillion yuan, and the debt allocation gap of insurance companies in the first quarter of this year will be about 85 billion yuan according to the proportion of bond purchase scale of insurance companies in custody last year to premium income. Assuming that the premium income in the second quarter is about 40% lower than that in the first quarter (the average quarter-on-quarter decline since 2019), historically the proportion of bond purchases by custodian insurance companies in the second quarter is about 17%, so it is estimated that the allocation exposure of insurance companies in the second quarter is about 220 billion yuan, and the overall bond allocation exposure of insurance companies is about 300 billion yuan when superimposed on the debt allocation gap in the first quarter. From the perspective of wealth management, the current downward trend in deposit interest rates and the rapid strengthening of the bond market in the first quarter have made the yield of wealth management products perform better, and the scale of wealth management in the second quarter is expected to expand, which is expected to increase by 750 billion yuan compared with the first quarter (about the average of the growth of wealth management scale in the second quarter of 2022 and 2023 compared with the first quarter), and fixed income products account for the main scale. From the perspective of bond funds, according to the experience of the scale increase in the second quarter of history, it is expected that the scale will increase by 200 billion to 300 billion yuan in the second quarter of this year.
Overall, the total exposure to bonds (commercial banks + insurance + debt base + wealth management) in the second quarter was about 2.75 trillion yuan.
In terms of asset supply, we simulate three scenarios: low, neutral, and large supply pressure. From the perspective of local government bonds, according to historical experience, under the condition that the supply pressure is on the low side, the cumulative issuance scale of local general bonds in the first half of the year accounts for about 50% of the annual issuance scale, and the cumulative issuance scale of special bonds accounts for about 45% of the annual issuance scale, so it is estimated that in the second quarter, local general bonds are expected to be issued 537.6 billion yuan, and special bonds are expected to be issued 1,470.9 billion yuan; under the neutral scenario, the cumulative issuance scale of local general bonds in the first half of the year accounts for about 60% of the annual issuance scale In the second quarter, it is estimated that 746 billion yuan of local general bonds and 2,035.5 billion yuan of special bonds are expected to be issued; under the situation of high supply pressure, the cumulative issuance scale of local general bonds in the first half of the year accounts for about 70% of the annual issuance scale, and the cumulative issuance scale of special bonds accounts for about 65% of the annual issuance scale, so it is estimated that the issuance of local general bonds in the second quarter is expected to be 954.3 billion yuan, and the issuance of special bonds is expected to be 2,600.2 billion yuan. In the second quarter, the total repayment scale of local general bonds and special bonds was 1,003.1 billion yuan, and the total net supply scale of the two was about 1.0 trillion yuan, 1.8 trillion yuan and 2.6 trillion yuan respectively under the condition that the supply pressure was small, neutral and large.
From the point of view of treasury bonds, according to historical experience, under the condition that the supply pressure is on the low side, the cumulative issuance scale of general treasury bonds in the first half of the year accounts for about 35 percent of the annual general treasury bond issuance scale and 20 percent of the total special treasury bond issuance scale, and it is estimated that the treasury bond issuance in the second quarter is expected to be 1.78 trillion yuan; under the neutral scenario, the cumulative issuance scale of general treasury bonds in the first half of the year accounts for about 40 percent of the annual general treasury bond issuance scale and 50 percent of the total special treasury bond issuance scale It is estimated that 2.66 trillion yuan of treasury bonds are expected to be issued in the second quarter, and under the situation of high supply pressure, the cumulative issuance scale of general treasury bonds in the first half of the year accounts for about 45% of the total issuance scale of general treasury bonds and 80% of the total issuance scale of special treasury bonds, and it is estimated that the issuance of treasury bonds in the second quarter is expected to be 3.54 trillion yuan. In the second quarter, the total repayment scale of government bonds was 2.28 trillion yuan, and the net supply scale of government bonds was about -494 billion yuan, 382.2 billion yuan and 1.26 trillion yuan respectively under the situation of small, neutral and large supply pressure.
From the perspective of the overall net supply of government bonds, the net supply of government bonds is about 511.4 billion yuan, 2.16 trillion yuan and 3.81 trillion yuan respectively under optimistic, neutral and pessimistic conditions.
On the whole, in the case of small supply pressure, the net supply of government bonds is small, the medium and long-term bond allocation exposure of institutions is greater than the net supply of government bonds, the underallocation pressure is still there, the DR007 pivot is difficult to decline due to the impact of the stable exchange rate, and the 10-year treasury bond interest rate may further strengthen, and the 10-year treasury bond interest rate and DR007 diverge or continue to deepen; in the neutral case, the medium and long-term bond allocation exposure of institutions can basically cover the total net supply scale of government bonds, and DR007 may have upward momentum due to the impact of bank fund allocation, and the pivot may fall below 1.9%-1.95%, the underallocation pressure in the bond market has declined, and the 10-year Treasury bond interest rate may be 2.2%-2.35% The range tends to run towards the upper limit of the band, and the divergence between the 10-year treasury bond interest rate and DR007 is expected to converge; in the case of large supply pressure, the market may have a large funding gap, which may trigger a tight capital situation, and the interest rate of DR007 and the 10-year treasury bond may rise, and the increase depends on whether the central bank releases liquidity by increasing open market operations or cutting the reserve requirement, and the 10-year treasury bond may touch 2.40%, and the divergence between the two is also expected to converge.
In addition, from the perspective of credit bonds, the decline in interest rates to a low level in the first quarter of this year has accelerated the issuance of credit bonds, and the net financing has recovered to 766.1 billion yuan, and the net financing scale of credit bonds in the second quarter is expected to fall at about 7,000 yuan according to the linear calculation of the issuance scale in April. The expansion of wealth management scale in the second quarter can basically absorb the increase in the scale of net financing of credit bonds.
Fourth, this week's market outlook
Central Bank Operation and Liquidity Outlook: This week, 10 billion yuan of reverse repurchase is due, 70 billion yuan of treasury cash fixed deposit is due, and 820.3 billion yuan of NCD is due.
This week's bond issuance plan: This week, 1 treasury bond is planned to be issued, with an issuance amount of 125 billion yuan and a net financing amount of -232.720 billion yuan, a decrease of 350.533 billion yuan from last week. This week, 22 local bonds are planned to be issued, with an issuance amount of 72.477 billion yuan and a net financing amount of 37.452 billion yuan, a decrease of 795 million yuan from last week. This week, the government and financial bonds plan to issue 3, with an issuance amount of 20 billion yuan and a net financing amount of 6.880 billion yuan, a decrease of 149.120 billion yuan from last week.
Events to Watch This Week: This week is in focus on the 1-year and 5-year loan prime rates (LPRs).
5. Last week's market review
1. Open market operations and money market liquidity
From April 15 to April 19, the central bank invested a total of 110 billion yuan in the open market, with 182 billion yuan due and a net return of 72 billion yuan. Among them, 10 billion yuan was invested in reverse repurchase, and 12 billion yuan was due. MLF invested 100 billion yuan, and 170 billion yuan expired. As of April 19, a total of 10 billion reverse repurchases have not expired.
From the perspective of interest rates, DR001 closed at 1.80% on April 19, up 8.48bp from April 12, DR007 closed at 1.88%, up 4.39bp from April 12, with a total of 34,667.576 billion pledged repurchase transactions last week, with a daily average of 4,952.511 billion, of which the average overnight repurchase transaction accounted for 89%. In terms of interbank certificates of deposit, the NCD interest rate of the 3-month joint-stock bank closed at 1.93% on April 19, down 5bp from April 12, the NCD interest rate of the 1-year joint-stock bank closed at 2.08%, down 5.87bp from April 12, and in terms of interest rate swaps, the two most active varieties last week: 1Y FR007 closed at 1.93%, up 2.3bp from April 12, and 1Y SHIBOR3M closed at 2.03%, down 1.38bp from April 12.
From the perspective of the shape of the money market interest rate curve, the 1D, 7D, 14D, and 21D funding rates have risen, and the curve pattern has not changed much from last week.
From the perspective of liquidity stratification, liquidity stratification converges. From April 15th to April 19th, the average spread between R001 and DR001 was 8.07bps, down 1.1bps from April 7th to April 12th, and the average spread between R007 and DR007 from April 15th to April 19th was 6.57bps, down 1.4bps from April 7th to April 12th.
2. Review of bond market trends
Bonds strengthened this week. At the beginning of the week, the MLF parity contraction continued, the industrial added value in March year-on-year, the social zero year-on-year recorded 4.5%, 3.1% year-on-year, less than market expectations, the first quarter GDP recorded 5.3%, higher than market expectations, but after the release of GDP data, the market is still pessimistic about prices, while the stimulus policy expectations weakened, the stock market fell, the bond market strengthened, and the 10-year bond interest rate fell to 2.27%. In the middle of the week, the State Council Information Office held a press conference, which pointed out that the preliminary screening of this year's special bond projects has been completed, and the construction of additional treasury bonds in 2023 will start before the end of June this year, and the implementation of 1 trillion special treasury bonds this year will begin to be organized after approval, and the supply shock of the bond market in April has not yet arrived, and the 10-year bond interest rate has fallen by about 1bp to 2.26%. Approaching the weekend, the central bank pointed out that there is still room for future monetary policy, but to prevent the idling of funds, etc., the international situation between Iran and Israel, the Biden administration intends to continue to increase steel and aluminum tariffs, the Office of the United States Trade Representative announced the launch of a 301 investigation against China's shipbuilding industry, the domestic stock market fell, the Chinese bond market further strengthened, and the 10-year Chinese bond interest rate fell to 2.25%.
In terms of interest rates, the 1-year Treasury closed at 1.69% on April 19, down 0.25bps from April 12, the 3-year Treasury closed at 1.99%, down 0.06bps from April 12, the 5-year Treasury closed at 2.08%, down 3.64bps from April 12, and the 10-year Treasury closed at 2.25%, down 2.97bps from April 12. The 1-year CDB bond closed at 1.83% on April 19, up 2.11bps from April 12, and the 10-year CDB bond closed at 2.32%, down 7.96bps from April 12.
From the perspective of curve shape and term spread, the spread between 10-year Treasury bonds and 1-year Treasury bonds was 56.07bps on April 19, narrowing 2.72bps from April 12, and the spread between 10-year Treasury bonds and 5-year Treasury bonds on April 19 was 17.85bps, widening 0.67bps from April 12.
From the perspective of the implied tax rate, the implied tax rate of the 10-year CDB bond was 2.71% on April 19, down 1.99 percentage points from April 12, and the implied tax rate of the 5-year CDB bond was 2.89%, down 0.3 percentage points from April 3.
From the perspective of interest rate derivatives, the 1-year IRS-Repo closed at 1.93%, a change of 0bps from April 12, the 5-year IRS-Repo closed at 2.09%, a change of -2bps from April 12, T2412 closed at 104.52, a change of 0.33 yuan from April 12, and TF2412 closed at 103.4, a change of 0.14 yuan from April 12.
From the perspective of interest rate differentials between China and the United States, the interest rate spread between Shibor3M and Libor3M on April 19 was -354.52bps, down 4.59bps from April 12, and the spread between 10-year Chinese government bonds and 10-year U.S. Treasury bonds was -238.63bps, down 17bps from April 12.
From the perspective of bond issuance, from April 15 to April 19, 160 billion yuan of treasury bonds were issued, with a maturity of 42.187 billion yuan and a net financing of 117.813 billion yuan, local bonds issued 74.870 billion yuan, with a maturity of 36.623 billion yuan and a net financing of 38.247 billion yuan, government and financial bonds issued 156 billion yuan, with a maturity of 0.0 billion yuan and a net financing of 156 billion yuan, and credit bonds issued 400.777 billion yuan with a maturity of 292.853 billion yuan and a net financing of 107.924 billion yuan
Annotation:
[1] The bond market sentiment index is constructed from data such as implied tax rates, credit spreads, rating spreads, new and old bond spreads, and institutional behavior.
[2] For details of the month-on-month economic momentum index, please refer to the Industrial Research Report, "How the Economic Month-on-Month Bottoming Bond Market ?—— Interest Rate Market Observation".
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