CFIC Introduction
Overseas interest rate cut expectations have re-gathered, and the current position of Chinese dollar bonds has shown a high cost performance in terms of allocation value. Among them, we can focus on the categories of urban investment bonds and financial bonds, waiting for the window period for interest rate cuts.
Last week, the Markit iBoxx Chinese dollar bond investment grade index rose 1.13 and the speculative grade rose 2.16, while the yield to maturity of the Chinese dollar bond investment grade fell 0.16% and the speculative grade fell 0.16% and 0.68%. The Fed's unexpectedly "dovish" stance at last week's interest rate meeting instantly ignited the enthusiasm of investors who already no longer had much expectation of a rate cut this year. According to the analysis, the expectation of overseas interest rate cuts has re-gathered, and the current position of Chinese dollar bonds reflects a high cost performance in terms of allocation value. Among them, we can focus on the categories of urban investment bonds and financial bonds, waiting for the window period for interest rate cuts. The tone of the Fed's decision unexpectedly "dovish" rekindled market expectations for interest rate cuts, and a series of recent changes in U.S. economic data triggered a sharp rise in market expectations for Fed rate cuts. The U.S. Department of Labor's April non-farm payrolls data came in well below expectations, and rising unemployment and slower wage growth quickly revived expectations for the Fed to cut interest rates this fall. According to data from the U.S. Department of Labor, the number of new non-farm payrolls in the United States in April was 175,000, the lowest increase since October 2023, far less than the market expectation of 243,000 and the previous value of 303,000. Meanwhile, the unemployment rate unexpectedly rose to 3.9% in April, unchanged at 3.8%, and average hourly earnings rose 0.2% month-on-month in April, lower than expectations and the previous reading of 0.3%. At last week's interest rate meeting, Fed Chairman Jerome Powell made it clear that the next move is unlikely to be a rate hike and that the current level of interest rates will prove to be sufficiently restrictive. Wells Fargo predicts that the Fed may start cutting interest rates in September. Its analysis believes that although the US job market is still tight, it is far less hot than it was a year or two ago, which should support a further slowdown in inflation. Therefore, employment data for May and inflation data due before June 12 will be key to getting a glimpse of the Fed's decision-making moves. JPMorgan Asset Management has been more aggressive in saying that if CPI also shows signs of slowing, a rate cut as early as August could become the mainstream judgment of the market. According to the data, the market is now expecting a 10 basis point rate cut at the Fed's August meeting, up from 7 basis points before the report. According to CME Group's Fed Watch tool, the probability of a Fed rate cut in September has risen to 77%. Swap pricing reflects traders' expectations of a rate cut of around 50 basis points this year. In addition, the Fed also announced a slowdown in its balance sheet reduction plan in its May 2024 interest rate meeting statement. Beginning in June, the cap on the size of monthly redemptions on U.S. Treasuries will be lowered from $60 billion to $25 billion, while the redemption caps on agency bonds and agency mortgage-backed securities will remain unchanged, and any principal beyond this limit will be used to reinvest U.S. Treasuries, according to the statement. However, it should be noted that a number of Fed officials will take turns after the end of the "silence period" this week, and the new round of speeches will further influence the market's judgment on the direction of interest rates. Judging from the current market volatility, the change in Fed interest rate expectations has been priced in in the bond market. According to Xinhua Finance data, the yield on the 10-year Treasury bond and the yield on the 2-year Treasury bond fell significantly in consecutive days.
Institutional Consensus: Overweight Chinese Dollar Bonds Focusing on urban investment bonds and financial bonds, Bai Yuhan, a capital market researcher at China Merchants Bank, suggested that in the next six months, the investment grade of Chinese dollar bonds is particularly certain. Bai Yuhan said that high-yield bonds are affected by the downturn in the real estate industry, and the investment risk is high. In terms of sectors, financial bonds and urban investment bonds are worth paying attention to, while low- and medium-grade real estate bonds need to be relatively cautious, and US dollar bonds issued by some leading technology companies and central state-owned enterprises in the oil industry are also worth paying attention to due to their high security. Xu Liang, chief of fixed income at Huafu Securities, also believes that Chinese-funded dollar bonds have a high allocation value in the current position. Xu Liang pointed out that the yield to maturity of Chinese dollar bonds is currently at a high point since May 2019 (above 80%), and in the case of an increase in the expectation of interest rate cuts in the United States, it is possible to deploy Chinese dollar bonds in advance, especially high-yield bonds with good liquidity. In terms of bond selection, we can start from the perspective of coupons, focusing on urban investment bonds and financial bonds. According to the data, as of last Friday, the Chinese Chengtou dollar bond index was 138.07, and the Chinese financial dollar bond index was 260.34. In terms of urban investment bonds, since the beginning of 2024, the net financing of urban investment has picked up. The net repayment trend in 12 key regions has weakened significantly, with only Tianjin and Guizhou continuing to have a more obvious net repayment, but the gap is also narrowing; the net financing of many provinces has returned to normal, with the net financing of Chongqing and Guangxi reaching 23.9 billion yuan and 17 billion yuan respectively, with a clear recovery trend. It can be seen that regions with successful industrial transformation, resource endowments or more debt resources may become the intervention points of urban investment dollar bonds. In terms of financial bonds, regional commercial banks have recently increased their support for agriculture, rural areas, small and micro enterprises, and green finance, and the number and scale of financial bond issuance have rebounded sharply. In addition, due to the rising short-term debt repayment pressure, the scale of financial bond issuance is expected to continue to increase, and the demand for capital replenishment by various banks and securities companies is still strong. Taking last week's primary market issuance as an observation incision - last week, affected by the "May Day" holiday, only 8 companies issued offshore bonds, and the primary market was relatively thin, and the issuers were mainly urban investment enterprises. Among them, Jiujiang City Development Group Co., Ltd. (Jiujiang Urban Development) issued US$300 million senior bonds with a coupon rate of 6.55%, the largest US dollar bond last week, which was rated BBB- (Fitch) and listed on the ASX. MTR Corporation issued US$56 million bonds with a yield of 5.03% with a maturity of 7 years, and China Gas issued HK$500 million bonds with a coupon of 4.5%. In the secondary market, the performance of urban investment and financial dollar bonds was also outstanding last week. Last week, the KMRLGP 8.5 12/07/25 issued by Kunming Rail Transit Group Co., Ltd. yielded 10.54%, the TSIVMG 1.55 12/17/29 issued by Tianjin State-owned Capital Investment and Operation Co., Ltd. yielded 20.49%, the HKIBHK 1.5 PERP issued by AMTD IDEA Group yielded 166.43%, and the GLPSP 4.6 PERP issued by GLP reached 31.94%.
Source of this article: Xinhua Finance
Author: Tan Rui
WeChat editor: Liu Sile
Introduction to "Risk Warning: Financial Edition".
Finance is the lifeblood of the modern economy, and financial stability leads to economic stability. Financial security is related to the overall development of national and regional enterprises, and it is necessary to maintain a high degree of vigilance against financial risks at all times, enhance the awareness of risk prevention, respond scientifically, and prevent them from occurring. Under the guidance of the authoritative government departments, relying on the advanced big data public opinion monitoring system and a professional analyst team, the "Risk Warning Financial Edition" produced by the China Financial Information Center summarizes, analyzes, and judges the risk public opinion in different fields and categories of the financial industry, and provides authoritative, professional, practical, timely and effective financial risk public opinion monitoring, research and judgment, early warning and response suggestions for financial regulatory departments, factor markets, financial institutions, listed companies, industry associations, various enterprises, colleges and universities, research institutions, etc. 18,000 per year, once a week, released every Friday.
Latest Report:
【April 2024 Issue 4】Total Issue 124: Regulatory penalties for public funds are exposed
【April 2024 Issue 3】Issue 123: Industry Reshuffle!
【April 2024 Issue 2】Total Issue 122: The dream of the gold exchange is finally empty