Recently, the central bank has confirmed that it has signed bond borrowing agreements with several major financial institutions, and the financial institutions that have signed the agreement can lend hundreds of billions of yuan of medium and long-term treasury bonds, and will borrow treasury bonds in an indefinite term and credit mode, and will continue to borrow and sell treasury bonds depending on the operation of the bond market.
Affected by this news, Treasury bond futures fell on July 5. At the close, the main 30-year Treasury bond futures contract fell 0.31%, the main 10-year Treasury bond futures contract fell 0.14%, and the 5-year Treasury bond futures main contract fell 0.07%.
What is the size of the Treasury bonds that can be borrowed? //
Treasury bond borrowing refers to the central bank's borrowing of treasury bonds from some primary dealers in the open market in order to maintain the stable operation of the bond market, pay the corresponding interest and fees, and agree to repay them after maturity.
Specifically, the central bank can sell it in the secondary market after borrowing Treasury bonds, thereby driving down the market price of Treasury bonds, pushing up the yield of related Treasury bonds, and adjusting interest rates.
At present, the central bank has confirmed that the financial institutions that have signed the agreement can lend hundreds of billions of yuan of medium- and long-term treasury bonds, and a number of institutions have calculated the scale of treasury bonds that the central bank can lend from primary dealers.
On May 31, the People's Bank of China (PBOC) assessed and determined the primary dealers of open market business in 2024 according to the evaluation and adjustment mechanism for primary dealers of open market business. There are 51 in total, including large state-owned banks, joint-stock banks, policy banks, foreign-funded banks and securities firms, among which there are 29 listed banks (6 state-owned banks, 9 joint-stock banks, 11 urban commercial banks and 3 rural commercial banks).
According to the central bank's announcement, there will be a total of 51 primary dealers in the open market business in 2024, and considering the availability of data, we mainly focus on 30 of the mainland-listed banks.
As of May 2024, the scale of treasury bonds held by commercial banks is about 20.31 trillion yuan, while the proportion of existing treasury bonds with a maturity of more than 10 years is about 58%, and since long-term treasury bonds are usually held by insurance companies with a more stable liability structure, we calculate the treasury bonds with a maturity of more than 10 years held by commercial banks at a ratio of 20%, which is about 2.37 trillion yuan. In 2020, the total assets of banking financial institutions were about 319.74 trillion yuan, while the 2020 annual reports of the banks in the sample showed that the total assets were about 206.52 trillion yuan, accounting for about 65% of the total assets of the whole industry. At a rate of 65%, the 30 listed banks in the list of primary dealers hold about 2.6 trillion yuan of treasury bonds with a maturity of more than 10 years. Regardless of the pledged part, assuming that the bank can lend 25% of the treasury bonds to the central bank, the scale will be about 660 billion yuan.
Guosheng Securities used 29 of the listed banks as a sample for calculation. In the structure of treasury bond holders, commercial banks account for 71%, so the sample is also representative. It is estimated that the 29 listed banks that are primary dealers hold treasury bonds with a remaining maturity of more than 10 years around 2 trillion yuan. The scale of treasury bonds of more than 10 years that have been pledged is about 670 billion yuan, and the scale of treasury bonds of more than 10 years that are not pledged is about 1.3 trillion yuan.
Regarding the scale of the central bank's operation in the secondary market, Wanlian Securities Research Institute believes that the central bank will incorporate the trading of treasury bonds into its daily toolbox, and the scale of the first transaction is expected to be limited. From the perspective of the scale of operation, due to the limitation of the active stock of 10Y treasury bonds, it is expected that the intraday trading volume will be limited, or it may be difficult to exceed 100 billion yuan.
What is the impact on the bond market? //
With the signing of the central bank borrowing agreement, it means that the central bank's bond selling operation may be implemented, what impact will this have on the bond market?
Market participants believe that, theoretically, after the central bank borrows Treasury bonds, it may sell them in the open market at any time to adjust long-term yields. The scale of the central bank's operations should not be expected to be too high, and the central bank is more of a signal to guide the long-term treasury bond yield upward. As the central bank expects more guidance, long-term Treasury yields are expected to gradually return to the desired range.
Guolian Securities believes that the central bank's borrowing of securities is conducive to the stability of funds in the short term, and in the long run, it will tighten the liquidity margin, but the overall impact also depends on the total amount of securities borrowing. From a time perspective, under the current regulations, the time frame for the central bank to buy back bonds to release liquidity may be as long as one year.
Soochow Securities said that for the current bond market, we still maintain a bullish view. On the one hand, the specific amount of treasury bonds borrowed by the central bank is not yet clear, and the subsequent sale of bonds needs to be based on the treasury bonds held by the central bank, and the strength needs to be further observed. On the other hand, this operation is counter-cyclical, and the yield may return to its own downward trend again, and this pullback has accumulated space for subsequent downside.
Everbright Securities said that in the next one or two quarters, it is a high probability event that the 10-year Treasury bond yield hits 2.5%. Long-term Treasury yields will eventually return to a reasonable range that matches long-term economic growth expectations. If the market reacts mutedly to the central bank's expectation guidance, the central bank is likely to further increase the expectation guidance and start using other policy tools.
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