Financial reporter Liu Xiao
Recently, long-term government bond yields have continued to fall, of which the 30-year government bond yield has fallen below 2.5%, which has attracted widespread attention in the market.
On the evening of April 23, the Financial Times, a subsidiary of the central bank, published an interview with the relevant person in charge of the central bank on the continued decline in long-term government bond yields. The person in charge said that long-term Treasury yields mainly reflect long-term economic growth and inflation expectations, but they are also disturbed by other factors such as supply and demand. 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 also said that the central bank carries out treasury bond trading in the secondary market, which can be used as a liquidity management method and a reserve of monetary policy tools.
Previously, the central bank emphasized at the regular meeting of the Monetary Policy Committee for the first quarter of 2024 held on March 29 that "in the process of economic recovery, we should also pay attention to changes in long-term yields".
How to understand the central bank's latest statement on the trend of long-term treasury bond yields? Will the central bank buy bonds in the secondary market? On April 24, Fengkou Finance interviewed Feng Lin, director of the research and development department of Oriental Jincheng.
Wind Finance and Economics: The central bank previously proposed for the first time in the communiqué of the first quarter regular meeting that "in the process of economic recovery, we should also pay attention to the changes in long-term yields", and this time it made the latest response. Why are central banks concerned about long-term yields?
Feng Lin: First of all, fundamental expectations (economic growth and inflation) are the core factors that determine the trend of long-term yields, and the leading factor for the continuous decline in long-term yields since the beginning of this year is also the market's weak expectations for fundamentals. However, judging from the actual economic operation and growth prospects, on the one hand, the GDP growth rate in the first quarter exceeded market expectations, the manufacturing PMI returned to the expansion range in March, the positive factors for the economic rebound are accumulating, and the fundamentals of the mainland's long-term economic improvement have not changed; on the other hand, although the current CPI trend is low, "inflation is expected to rise moderately from the low level in the future." In other words, the central bank sees the current long-term yield trend diverging from the economic upturn at the beginning of the year and diverging from the long-term outlook for fundamentals.
Second, the central bank's focus on long-term yields also has risk prevention considerations. The relevant person in charge of the central bank mentioned in the interview, "For transactional investors, by increasing leverage and extending the duration, they can get more benefits in the short-term price rise, but it is also easy to exacerbate market volatility and need to bear the losses caused by a 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. "In view of the lessons learned from the recent crisis of small and medium-sized banks in the United States, the central bank's concern about the inversion of the return on assets and the cost of liabilities that financial institutions may face in the future is forward-looking and necessary.
How should we understand the statement that "the central bank can use the secondary market to buy and sell treasury bonds as a liquidity management method and a reserve of monetary policy tools"? Will the central bank buy bonds in the secondary market?
Feng Lin: Actually, there has been a lot of discussion about the central bank's next purchase and sale of government bonds, and the market has more of an analogy with China's version of QE, that is, the central bank buys bonds to release liquidity and expand the policy space for monetary easing. It should be pointed out that there is no legal obstacle for the central bank to buy Treasury bonds in the secondary market. Article 29 of the current 2003 People's Bank of China Law stipulates: "The People's Bank of China shall not overdraft government finances and shall not directly subscribe for or underwrite treasury bonds and other government bonds." This means that the central bank is not allowed to directly subscribe for treasury bonds in the primary market, but this provision does not preclude the central bank from buying and selling treasury bonds in the secondary market.
On April 23, the Ministry of Finance expressed its support for gradually increasing the purchase and sale of treasury bonds in the open market operations of the mainland central bank to enrich the monetary policy toolbox. This was also interpreted by the market as an increase in the likelihood that the central bank would buy bonds to match the fiscal expansion, which boosted the bond market on the day. However, after carefully understanding the interview with the relevant person in charge of the central bank on the evening of April 23, we believe that the central bank's treasury bond trading is not equal to QE, because "the central bank's treasury bond operation will also be two-way in the future", that is, the central bank can not only buy bonds to release liquidity, but also sell bonds to guide market interest rates to rise.
In view of the central bank's concern about the continued downward trend of long-term yields, and the central bank's belief that the underlying logic of long-term yields falling and deviating from fundamentals is the lack of "safe assets" in the market, it is predicted that "with the issuance of ultra-long-term special treasury bonds in the future, the 'asset shortage' situation will be alleviated, and long-term treasury bond yields will also recover" In our judgment, the possibility of the central bank buying bonds in the short term is very small, which means that the ultra-long-term special treasury bonds that are about to be issued will most likely be issued in a market-oriented manner, rather than being purchased by the central bank in the secondary market after directional issuance. At the same time, we are concerned that as of the end of March 2024, the balance of the "claims on the central government" on the balance sheet of the central bank was 1.52 trillion yuan, mainly the special treasury bonds issued in 2007 (renewed in 2017 and 2022), so the possibility of the central bank selling its treasury bonds in the secondary market cannot be completely ruled out.
Fengkou Finance: In this context, how do you see the trend of the bond market?
Feng Lin: For the bond market, this means that there will be at least two risks of a correction caused by two pressures in the future. First, the central bank continues to mention that it is concerned about long-term yields, clearly suggesting that the risks that may be caused by the future rise in interest rates will cause the market to worry about the central bank's intention to guide the long-term yield recovery, thereby suppressing the long-term bond market.
In addition, as the core factor determining the trend of long-term yields, the fundamentals showed a positive trend in the first quarter, which also increased the uncertainty of the subsequent bond market trend. As a result, we expect that the sharp downward deviation of long-term Treasury yields from the policy rate will ease in the future, and the bond bull market since the beginning of the year may turn into a correction phase. However, the impact of sentiment and supply and demand on the bond market is phased, and in the medium and long term, the key is to see the success and sustainability of the economic rebound, which is the core of determining the medium and long-term trend of long-term yields.