People who have been accustomed to the debt base of "collecting eggs (net value rose by 0.01%)" every day collectively changed their emojis on April 24.
Image source: Netizens in the investment community
On April 24, the Financial Times published a report on the response of the heads of relevant departments of the central bank to the trend of long-term treasury bonds and the issue of buying and selling treasury bonds. The central bank clearly pointed out that "fixed-rate long-term bonds have a long duration and are sensitive to interest rate fluctuations, and investors need to pay close attention to interest rate risk." ”
Who are long-term bonds? The report begins with a statement, "Recently, long-term Treasury bond yields have continued to fall, with the yield on 30-year Treasury bonds falling below 2.5%. ”
The main 30-year treasury bond futures contract TL2406 fell 1.17% in response, and fell for three consecutive trading days, with a cumulative decline of nearly 2%.
According to the data of Oriental Wealth Choice, as of April 26, Pengyang China Bond - 30-year Treasury Bond ETF and Bosera SSE 30-year Treasury Bond ETF fell by 1.44% and 1.32% respectively in a week, ranking first and second in the weekly decline of non-convertible bond funds, and entering the top 10 weekly declines Galaxy Bank Credit Tianli, GF Jingli Pure Bond, Nanhua Ruize and other bond bases, the proportion of treasury bonds also exceeded 20%.
The yield of the bond base is accumulated over time, and the decline in the past week has made many investors give back their earnings fiercely, or even turn from positive to negative. For example, the cumulative income of Galaxy Bank Trust Tianli during the year is only 0.22%. As for the treasury bonds that allow investors to reap "small happiness", why does the central bank warn of the risks? Can the bond base still be bought?
1
Alarming the central bank Where does the risk of 30-year Treasury bonds come from?
Treasury risk mainly comes from two aspects: inflation and liquidity. The coupon rate of Treasury bonds is fixed, and if the CPI rises more than the coupon rate at the maturity of the holding, a loss will be incurred. In addition, the price of Treasury bonds trading in the secondary market will fluctuate, and the price will rise, and the yield relative to the maturity coupon will fall. When money is piled up to buy, bond yields fall significantly, which means that there is a downside risk of crowded trading.
It is these two points that the central bank is worried about. This report in the Financial Times is relatively long and has a lot of technical terms, and Uncle Wolf directly published a simplified version.
1. Alert to the risk of rising prices. The mainland economy has a good foundation, strong resilience, excellent momentum, great potential and vitality, and the central bank is optimistic about the prospects for economic growth for a long time, and inflation is expected to rebound moderately from low levels in the future.
2. Alert the risk of overheating the transaction. Now that there is abundant capital in the market, transactional investors can increase their leverage and concentrate on buying long-term treasury bonds, making profits from a sharp rise in short-term prices, but they are also prone to exacerbate market volatility and need to bear the losses caused by a sharp decline in prices.
3. Long-term treasury bonds continue to rise sharply, which is not in line with policy guidance. "Long-term Treasury yields should generally match long-term economic growth expectations. "The continued sharp rise in long-term Treasury prices and the excessive decline in yields mean that the market is not optimistic about the long-term outlook for the economy and believes that no other safe assets can be found. The periodic divergence between long-term government bond yields and long-term economic growth expectations is not conducive to restoring market confidence.
The third point is to focus on the central bank's characterization of the development of the treasury bond bull market to the current stage. The 30-year treasury bond futures fell for three consecutive trading days, obviously understanding the meaning of the central bank, just like the title of CCB Futures' research report - "Treasury bonds: not against policy".
2
Reversal of supply and demand There will be two major changes in the bond market
The central bank has sent a clear signal to push long-term Treasury yields upwards and guide the market to rebuild confidence in the long-term outlook for the economy. What changes will occur in the bond market in the future?
The first change: the asset shortage caused by the imbalance between supply and demand has eased. The current bond market, especially the bull market of long-term treasury bonds, is the result of the decline in the risk appetite of the people, and the continuous influx of funds into low-risk products such as bank wealth management and bond funds.
In a report in the Financial Times, the central bank made it clear 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." "After May, local bonds and ultra-long-term special treasury bonds will be issued one after another, and the asset shortage is expected to ease to a certain extent.
From the perspective of funds, the first quarter regular meeting of the Monetary Policy Committee held by the central bank at the end of March proposed that "in the process of economic recovery, we should pay attention to the changes in long-term yields", and since then it has carried out a survey on the bond investment of city commercial banks, one of the main forces in the bond market. In the above report, the central bank also raised the problem of the overallocation of long-term bonds by small and medium-sized banks in the United States, and the crisis when interest rates rise, conveying the risk that financial institutions may face the inversion of the return on assets and the cost of liabilities in the future. This will lead to a certain amount of capital outflow from long-term government bonds in the bond market.
The second change: the central bank may sell Treasury bonds. In the above-mentioned interview, the central bank said that the trading of treasury bonds in the secondary market can be used as a liquidity management method and a reserve of monetary policy tools. Many self-media are saying that this is China's version of QE quantitative easing, and the central bank directly enters the market to buy treasury bonds and release money on a large scale. In fact, from the response to the long-term treasury bond problem, it can be seen that the central bank's current policy focus is not to further reduce interest rates, but to believe that the market is overbetting on the long-term economic sluggishness and persistently low inflation.
From this point of view, the central bank does not necessarily want to buy treasury bonds immediately, but may sell treasury bonds, increase the yield of treasury bonds, and guide the market to increase confidence in long-term economic growth.
Uncle Wolf specially checked the data, as of the end of March 2024, the balance of the "claims on the central government" account on the central bank's balance sheet was 1.52 trillion yuan, mainly the special treasury bonds issued in 2007 (renewed in 2017 and 2022). These stocks of special treasury bonds can be sold in the secondary market.
In fact, there was a wave of shocks in the bond market in early March, when the export data from January to February improved more than expected, and the CPI in February turned from falling to rising year-on-year. Looking forward to the medium term, the macro situation is gradually stabilizing and improving, and the issuance of ultra-long-term special treasury bonds, with the change of these key factors, the bond bull market, which is jokingly called day up by investors, may be about to turn into a shock mode. More caution is needed when it comes to government bonds or the reallocation of government bonds. If the recovery of economic fundamentals is further strengthened, the monetary policy will begin to show signs of closing, and the adjustment of the bond market will be inevitable.
(Note: Investment is risky, and the views are for reference only and should not be used as a basis for decision-making.) ）
Source: Old Wolf Finance