CFIC Introduction
The head of the relevant department of the People's Bank of China said in a recent interview with the media that the yield of long-term government bonds mainly reflects the expectation of long-term economic growth and inflation, but it will also be disturbed by other factors such as supply and demand.
Long-term Treasury yields have continued to decline recently, with the 30-year yield falling below 2.5%. The head of the relevant department of the People's Bank of China said in a recent interview with the media that the yield of long-term government bonds mainly reflects the expectation of long-term economic growth and inflation, but it will also be disturbed by other factors such as supply and demand.
The person in charge said that the fundamentals of the mainland's long-term economic growth have not changed, the mainland's economy has a good foundation, strong resilience, excellent momentum, great potential, and full vitality, and the central bank is optimistic about the prospects for economic growth in the long run. However, factors such as supply and demand can also bring short-term disruptions to long-term Treasury yields. In some advanced economies, when economic growth expectations were relatively good, there was also a situation where government bond yields diverged from long-term economic growth expectations due to the periodic imbalance between market supply and demand.
Long-term bond yields are supported
"Long-term Treasury yields generally operate within a reasonable range that matches long-term economic growth expectations. The person in charge believes that the mainland's real economic growth rate will remain at a reasonable level for a long time to come, and the trend of rebounding and improving in the past year has been consolidated. Some institutional investors also believe that inflation is expected to pick up moderately from its lows in the future, and long-term Treasury yields, as nominal interest rates, will itself increase as inflation rises. Both of these will support long-term bond yields. It should be noted that the development of the mainland bond market has made great progress, ranking second in the world in terms of total volume, but there is still a process of continuous improvement and improvement of the market depth and price formation mechanism, the market operation is more complex, and the long-term treasury bond yield and long-term economic growth expectations will diverge in stages.
Some market participants believe that the slowdown in the pace of government bond supply this year may be a factor leading to the short-term divergence between the two. Compared with the same period last year, the pace of government bond issuance in the first quarter of this year was slow, with the issuance volume falling by nearly 240 billion yuan year-on-year, and the net financing amount being about 470 billion yuan less than the same period last year. In the context of the temporary imbalance between bond supply and demand, institutional investors began to concentrate on buying long-term assets in the hope of obtaining higher returns, which increased the decline in long-term bond interest rates. Overall, supply and demand in the bond market are expected to be balanced in the future. Recently, the countercyclical adjustment of monetary policy has been relatively strong, which has created a good liquidity environment for the smooth operation of the bond market. The intensity of the proactive fiscal policy is relatively large, and the scale of government bonds planned to be issued this year is not small, and the pace of issuance will be accelerated in the future. With the issuance of ultra-long-term special treasury bonds in the future, the situation of "asset shortage" will be alleviated, and the yield of long-term treasury bonds will also rise.
The person in charge said that theoretically, long-term bonds with fixed interest rates have a long duration and are more sensitive to interest rate fluctuations, and investors need to attach great importance to interest rate risks. For transactional investors, by increasing leverage and extending the duration, they can get more benefits in the short-term price rise, but they are also prone to exacerbate market volatility and need to bear the losses caused by the sharp decline in prices. For banks, insurance and other allocation investors, if a large amount of funds are locked in long-term bond assets with too low yields, if the cost of the liability side rises significantly, they will face a passive situation of income not covering expenditure. Last year, Silicon Valley Bank used a large amount of deposits and short-term borrowings to buy long-duration U.S. Treasury bonds and mortgage-backed securities (MBS), short-term debt, long-term investment, and maturity mismatch, and then as the Federal Reserve raised interest rates and interest rates, bond asset prices plummeted, resulting in insolvency and liquidity crises for banks.
The PBOC's trading of treasury bonds is very different from QE's operations
The person in charge also said that the central bank to carry out treasury bond trading in the secondary market, which can be used as a liquidity management method and a reserve of monetary policy tools. The Central Financial Work Conference proposed that "it is necessary to enrich the monetary policy toolbox and gradually increase the trading of treasury bonds in the open market operations of the central bank." The mainland has already ranked third in the world in terms of the size of the mainland's treasury bond market, and its liquidity has increased significantly, which has made it possible for the central bank to carry out the trading of treasury bonds in the secondary market. Many experts have pointed out that the central bank's open market operation can cooperate with the fiscal department to carry out deficit financing, but the scale of treasury bond issuance must be relatively large enough, and the pace of issuance must be relatively stable, so as to effectively achieve policy transmission and avoid large fluctuations in market interest rates; moreover, the central bank's treasury bond operation in the future will also be two-way. It should also be noted that the central banks of some advanced economies have been forced to buy government bonds on a large scale in one direction to achieve their monetary policy goals when their conventional monetary policy tools have been exhausted, while the mainland has insisted on implementing a normal monetary policy, and the PBOC's buying and selling of government bonds is completely different from the quantitative easing (QE) operations of these central banks.
Previously, some industry experts said that historically, the mainland central bank tried to buy and sell treasury bonds in 1997, but it was limited by the lack of market depth and breadth, and it was soon suspended. Over the years, the mainland treasury bond market has developed sustainably and by leaps and bounds, providing conditions for the central bank to carry out the trading of treasury bond cash bonds.
"Coordinated fiscal and financial policies are a powerful driving force for improving the quality of financial supply. The Ministry of Finance Party Group Theory Study Center Group said a few days ago that in terms of meso-mechanism, it is necessary to strengthen the coordination and cooperation of fiscal and monetary policies and financial reforms, improve the mechanism of base money delivery and money supply regulation, support the gradual increase in the central bank's open market operations, enrich the monetary policy toolbox, and study and expand the variety and scale of government bond counter sales. Improve the long-term mechanism for overseas sovereign bond issuance. Deepen the market-oriented reform of interest rates, smooth the interest rate transmission mechanism, give better play to the role of the treasury yield curve pricing benchmark, and improve the efficiency of capital allocation.
Source of this article: China Securities Journal
Author: Peng Yang
WeChat editor: Liu Sile
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