The three major disruptive factors have exacerbated the divergence of the bond market

Multiple factors disturbed the atmosphere of "bond bulls", and this week, treasury bond futures fell across the board, and spot bonds collectively pulled back.

On the whole, the long-short game in the bond market has become more intense this week, and the yields of treasury bonds of various maturities have rebounded by more than 5BP (basis points). Among them, on Friday (April 26), the yield of the 30-year treasury bond active bond "23 interest-bearing treasury bond 23" rose by 4.45BP to 2.5125%, rising above the 1-year MLF (medium-term lending facility) interest rate and ending the inversion.

On April 28 (the working day of the Labor Day holiday), the yield of spot bonds in the interbank bond market continued to rise sharply, with the yields of 5-year, 10-year, and 30-year treasury bond active bonds rising by 4BP, 2.05BP, and 1.5BP respectively, and the 1-year varieties rising sharply by 7BP.

From the perspective of the industry, the central bank's frequent statements on long-term bond interest rates and financial concerns are the main disruptive factors, coupled with the regulatory attention of banks' bond purchases, the three major factors have led to changes in the market's expectations for the relationship between supply and demand in the bond market, and the future trend has fallen into divergence. The mainstream view of institutions is that the bond market is volatile in the short term and still optimistic in the long term.

The central bank has repeatedly stated its position on the interest rate of long-term bonds

In the view of many institutions, the important support for this round of bond cattle lies in liquidity obstruction and "asset shortage", and the pace of bond supply in the first quarter is slower than in previous years, which exacerbates the contradiction between supply and demand.

On Tuesday (April 23), the head of the relevant department of the central bank said that the yield of long-term government bonds will generally operate within a reasonable range that matches long-term economic growth expectations. The person in charge reminded 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 risk. The next day, the bond market took a clear turn, and the main 30-year contract of Chinese bond futures fell by 1.17%.

The above-mentioned person in charge of the central bank also said that long-term government bond yields mainly reflect long-term economic growth and inflation expectations, but at the same time, they will also be disturbed by other factors such as supply and demand, and "there will be a phased divergence". The central bank said that the scale of government bonds planned to be issued this year is not small, and the pace of issuance will accelerate 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.

This is not the first time that the central bank has spoken out on long-term bond interest rates against the backdrop of rising long-term bond interest rates, as it mentioned in early April that "in the process of economic recovery, we should also pay attention to changes in long-term yields". Subsequently, it was reported that the central bank and three policy banks discussed the trend of the long-term bond market, and the news of the plan to significantly increase the issuance of long-term bonds caused heated discussions in the market.

Since the beginning of April, the central bank, the Ministry of Finance, the National Development and Reform Commission and other ministries and commissions have increased the frequency of their statements on bond issuance. With the issuance of ultra-long-term government bonds and the supply of local government bonds expected to increase in the future, the market is increasingly concerned about supply-side pressure.

Wind data shows that the scale of local government bond issuance in January, February and March 2024 was 294.7 billion yuan, 601.1 billion yuan and 462.6 billion yuan, respectively, compared with 414 billion yuan, 813.8 billion yuan and 601.5 billion yuan in the same period last year.

From an institutional point of view, the central bank's statement and the possible increase in bond supply in the future have brought some pressure to the market, but the long-term "asset shortage" problem has not been alleviated, and the attractiveness of short- and medium-term bonds may increase.

The rise in the interest rate on certificates of deposit has caused financial concerns

In addition to the supply side, the market's concerns about liquidity have also increased, and the interest rate on certificates of deposit and short-term bonds has risen significantly recently. In this regard, many institutions believe that the ban on "manual interest supplementation" by banks may impact the bond market through liquidity.

According to the reporter's understanding, in early April, the self-discipline mechanism for market interest rate pricing (hereinafter referred to as the "self-discipline mechanism") issued the "Initiative on Prohibiting the Cultivation of Savings through Manual Interest Replenishment and High Interest Rate to Maintain the Order of Competition in the Deposit Market" to member institutions, requiring banks to self-examine the abuse of manual interest replenishment and complete rectification by the end of April.

Qin Han, a fixed income analyst at Zheshang Securities, believes that the ban on "manual interest supplementation" has led to a shortage of liabilities for large banks, which may not be the main reason for the price increase of this round of certificates of deposit, but the prohibition of "manual interest supplement" may lead to liquidity friction and institutional feedback behavior, which in turn amplifies the adjustment of the bond market. "For large banks, the loss of deposit scale due to the prohibition of manual interest rate replenishment is an objective problem, but there are many ways to supplement the liquidity gap, such as not excluding month-end financial redemption, but related behaviors will lead to periodic friction in liquidity, and in the context of the cooling of the entire bond bull atmosphere, it will also amplify the bond market adjustment and intensify the feedback level. Qin Han said in the research report.

On April 28, in order to maintain reasonable and sufficient liquidity in the banking system, the central bank launched a 7-day reverse repurchase operation of 2 billion yuan in the form of interest rate bidding, and the winning interest rate was 1.8%, and no reverse repurchase expired on the same day. In the past two weeks, the central bank's reverse repurchase has been dominated by net withdrawal, with a total of 2 billion yuan net injected through the open market since the 21st. From the perspective of capital market performance, DR001, DR007, and DR014 have risen to varying degrees this week.

At present, the yield of the 10-year Treasury bond is still nearly 20BP inverted with the MLF, and the market is also observing whether the central bank will raise the long-end yield by tightening funds in the context of the obvious decline in the guiding role of the policy rate on the market interest rate.

In this regard, Jin Qianjing, a bond analyst at Shenwan Hongyuan, said that from the perspective of the current monetary policy means, the central bank mainly adjusts the long-end yield through the funding rate and the MLF interest rate, considering that the MLF interest rate is linked to the LPR (loan market prime rate), and is the core medium-term policy rate, the probability of raising the long-end yield by raising the MLF interest rate is low, and the long-end yield is raised by tightening the capital side, the operating cost is low, or one of the feasible ways.

"However, referring to the experience of 2016 and 2020, the central bank tightens the funds rate and then raises the long-end yield, which is generally a signal of monetary policy shift after the economic fundamentals have improved significantly. Jin Qianjing believes that in the short term, the central bank through the policy statement to guide expectations is still the core means, is expected in the bond yield is significantly low in the case of the central bank related statements will form a certain negative for the bond market, or significantly increase the volatility of the 30-year treasury bonds, but in the housing price down, weak credit and other core factors are expected to be difficult to lead to a systemic reversal of the bond market, before the central bank confirms a new round of downward pressure on the economy and then lowers the policy rate, the overall yield of the bond market is expected to be dominated by low shocks.

There is still room for correction in institutional behavior

The debt bull has not yet ended, but only temporarily "rested", which is the mainstream view of the current institutions, but the short-term attitude has become cautious.

In the view of Yang Weiyi, a macro analyst at Guoyuan Securities, compared with liquidity support, bond supply is not the key factor in this round of bond market, and the key to whether the latter can form pressure lies in the degree of macroeconomic upward movement, that is, whether there is a continuous balance sheet expansion demand.

Yang Weiyi believes that the important support of this round of bond cattle is still liquidity obstruction, in the context of the declining credit cycle, banks can only "huddle" on interest rate bonds in the face of funds that cannot be cleared, which is also the reason why the market did not react much when facing a variety of negative factors.

"If our policy is regular, it will be difficult to reverse the liquidity blockage, and the bond bull will continue, and if our policy is unconventional, although it may reverse the liquidity blockage, it may cause bond yields to fall sharply. Yang Weiyi made this judgment in the research report.

From the perspective of institutional behavior, some banks, especially small and medium-sized banks, have been gradually corrected in their large-scale bond purchases. Following the central bank's investigation on the participation of rural commercial banks in the bond market last month, it has recently been reported that local branches of the central bank have provided window guidance to some rural commercial banks, requiring them to focus on their main business, reduce leverage and reduce bond duration.

At present, the market is still watching whether similar window guidance will be expanded. At a press conference held by the State Council Information Office on April 18, Zou Lan, director of the monetary policy department of the central bank, stressed the need to "prevent interest rates from being too low", leading to intensified competition and idling of funds.

From the perspective of demand, a number of industry insiders have told reporters that rural commercial banks are keen to buy bonds with their special factors, but they have also become a major reason for the M2-M1 scissors gap in the past two years. Behind the helplessness, the risk needs attention.

Lu Zhengwei, chief economist of Industrial Bank, wrote an article last year to warn of the risk of maturity mismatch. He believes that considering the regulatory requirement that the proportion of loans of rural commercial banks should not be less than 50%, and the overall loan proportion of 69 rural commercial banks at the end of 2022 is 53.74%, the funds that rural commercial banks can use to increase bond investment in the future are relatively limited. However, the loan growth rate of individual rural commercial banks is significantly lower than the growth rate of deposits, and one of the main reasons for the risk of Silicon Valley Bank in the early stage is that its deposits are high and the loan growth rate is relatively low, so more funds will be used for financial asset investment, so it is necessary to be vigilant against the potential risks of some rural commercial banks.

Qin Han believes that in the short term, incremental disturbances may drive the follow-up bond market sentiment is still cautious: the adjustment after the new high of US and Japanese stocks corresponds to the need for global investors to re-find value depressions, and the influx of incremental funds is good for the trend of the A-share and Hong Kong stock markets; the PMI data and policy level at the end of April may exceed expectations, driving the bond market to still have the possibility of adjustment; before the "May Day" holiday, institutions "hold bonds for the holiday" willingness or weak.

(This article is from Yicai)