21st Century Business Herald reporter Tang Jing reported from Beijing
The bull market will not only go up and down, but always have to stop and "take a break".
Since the beginning of this year, the mainland bond market has continued to strengthen, and long-term government bond yields have fluctuated downward, of which the yield on 30-year government bonds has fallen below 2.5%, which has inverted with the 1-year MLF interest rate, which has aroused great concern in the market. However, after the central bank stated on the evening of April 23 that "long-term treasury bond yields will generally operate within a reasonable range", this round of bond bull market finally has signs of "brakes".
On April 26, the treasury bond futures market fully corrected, with the 30-year main contract down 0.46%, the 10-year main contract down 0.26%, the 5-year main contract down 0.22%, and the 2-year main contract down 0.12%. The yield of the main interbank interest rate bonds rose sharply, with the yield of the 10-year active treasury bond "24 interest-bearing treasury bond 04" rising by 4.65BP to 2.3025%, and the yield of the 30-year treasury bond active bond "23 interest-bearing treasury bond 23" rising by 4.45BP to 2.5125%, finally rising above the 1-year MLF rate.
来源：wind
The market's previous surprise was that since the end of February this year, the yield of 30-year Treasury bonds has inverted with the 1-year MLF rate, which means that for banks, the yield on the allocation of 30-year Treasury bonds is lower than the cost of medium-term financing from the central bank, and there is an inversion of the asset side and the cost side.
The reason for this is that the reduction of high-yield assets in the context of asset shortage, and the increase in the allocation and trading of ultra-long-term bonds by institutions. Because bond prices are inversely proportional to yields, the large number of participants leads to an increase in bond market prices, which in turn leads to a decline in long-term bond interest rates.
In this regard, the person in charge of the relevant department of the central bank said that the underlying logic of the continuous decline in long-term treasury bond yields is the lack of "safe assets" in the market, and 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. He also stressed that long-term Treasury yields will generally operate within a reasonable range that matches long-term economic growth expectations.
Central bank "reminders"
Xiao Lisheng, director of the Global Macroeconomic Research Office of the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, explained that the rapid decline in the yield of 30-year treasury bonds and the intersection of the one-year MLF rate and the yield of 30-year treasury bonds in the first quarter under the condition that the policy rate remained relatively stable, indicating that there is a certain degree of mismatch in asset demand in the bond market.
Xiao Lisheng believes that according to relevant information, the main problem is that local financial institutions, such as rural commercial banks and urban commercial banks, are difficult to match their local credit needs. Due to the excess of local deposits and insufficient credit demand, these institutions are unable to conduct cross-border credit disbursement, so most of the time they choose to buy risk-free assets, reflecting the room for further improvement in credit demand.
A relevant person in charge of the financial market department of a rural commercial bank in central China once admitted to the media that buying bonds was a helpless move. On the one hand, the cost of the debt side of the rural commercial bank is high, and the cost of interest payment is high; on the other hand, the financing demand of enterprises has weakened, the loan supply on the asset side has not kept up, and the loan interest rate has continued to decline, and the decline in deposit interest rate is smaller than the decline in loan interest rate. Under the squeeze of the two parties, the "redundant funds" can only be invested in treasury bonds with high liquidity and security to alleviate the cost pressure on the debt side.
Although there is helplessness in "buying bonds by small banks", the hidden risks have to be guarded against. The person in charge of the relevant department of the central bank bluntly said in an interview 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.
He also mentioned a cautionary lesson for the banking industry, namely Silicon Valley Bank, which collapsed due to a serious mismatch in the maturity of its assets and libes caused by "borrowing short and buying long". 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.
In fact, since April, the central bank has repeatedly voiced concerns about the evolution of long-term Treasury yields. On April 3, the official website of the central bank released articles related to the regular meeting of the Monetary Policy Committee in the first quarter of 2024, which clearly mentioned that "in the process of economic recovery, we should also pay attention to the changes in long-term yields". On April 18, at a press conference held by the State Council Information Office, Zou Lan, director of the Monetary Policy Department of the People's Bank of China, also stressed the need to "prevent interest rates from being too low", leading to intensified involution competition and capital idling.
In an interview on April 23, the head of the relevant department of the central bank made a more detailed and clear statement. He bluntly said that even in the stage when some developed economies were expected to have better economic growth, there was a situation where the yield of government bonds diverged from the long-term economic growth expectation due to the periodic imbalance between market supply and demand.
He further pointed out that the mainland's real economic growth rate will remain at a reasonable level for a long time to come, and the upward trend of 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 is worth mentioning that, according to previous media reports, the central bank recently held a discussion with three policy banks to discuss the market situation of long-term interest rate bonds. Affected by multiple factors such as the imbalance between supply and demand, the yield of long-term interest rate bonds has fallen sharply recently. The fundamentals of the mainland's long-term macroeconomic improvement have not changed, and the current economy is steadily recovering, and the interest rate risk of long-term assets is worth paying attention to. Judging from the recently disclosed bond issuance plans, the three policy banks plan to significantly increase long-term bond issuance. Industry insiders believe that it is necessary to seize the time window to reduce the overall issuance cost throughout the year.
Will the debt bull continue?
A natural question is, after the central bank's "shouting", what will the bond market look at next?
Feng Lin, director of the research and development department of Oriental Jincheng, told reporters that the bond market will face at least 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, Feng Lin believes that as the core factor determining the trend of long-term yields, the economic fundamentals in the first quarter showed a trend of rebounding, which also increased the uncertainty of the subsequent bond market trend. However, the impact of sentiment and supply and demand on the bond market is phased, and the key to the medium and long term 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.
According to data released by the National Bureau of Statistics, in the first quarter of this year, the four major macro indicators of growth, employment, inflation and balance of payments showed a "stable start". Specifically, GDP grew by 5.3 percent year-on-year in the first quarter and 5.2 percent in the fourth quarter of last year; employment indicators were stable and improving, with the average surveyed urban unemployment rate at 5.2 percent, down 0.3 percentage points from the same period last year; the consumer price index (CPI) was unchanged from the first quarter of last year, and the core CPI after deducting food and energy prices rose by 0.7 percent year-on-year; and the balance of payments was generally balanced.
Qin Han, chief analyst of fixed income at Zheshang Securities, said that the central bank's continued voice suppressed the long-term sentiment of the bond market, especially long-term bonds, to a certain extent, and the economic fundamentals may have entered the recovery channel. If the manufacturing PMI data in April exceeds expectations again, it may have an impact on the medium- and long-term bullish logic of the bond market. In addition, the overall pace of government bond issuance in the first quarter was slow, and there may be a large supply of local government special bonds and special treasury bonds after May, which may constitute a certain degree of supply disruption.
Ming Ming, chief economist of CITIC Securities, is on the sidelines. Ming Ming believes that although the regulator's attention to the reasonable point of long-term interest rates has weakened the market's demand for long-term bonds, the problem of asset shortage has not been improved, and the allocation power of short-term long-term bonds may shift to the short and medium end, but long-term interest rates are still mainly volatile from a long-term perspective.
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