Recently, long-end bond yields have been declining, and the yield curve has shown a "bull flat" momentum (the long-end yield has fallen more than the short-end).
The yield on the 10-year Treasury Active (240004) bond closed at 2.233% on June 28, approaching near the all-time low set in April; The 30-year Treasury ETF is approaching 115. The yield on the 30-year Treasury Active (230023) bond closed at 2.4235%, falling below the MLF (medium-term lending facility) rate for the first time since the first quarter.
"Now it is basically as long as the price of bonds falls, it will be bought, firstly, there is a limited number of high-quality assets under the 'asset shortage', and secondly, we generally do not believe that the downward trend of bond yields in the medium term will change significantly, and the market still expects that it will be necessary to cut interest rates and reserve requirements in the future." A public fund researcher told reporters. In addition to domestic investors, foreign investors who sold RMB bonds last year have also increased their positions significantly, mainly buying certificates of deposit and treasury bonds.
The "debt cow" regained momentum
In June, the "debt cow" made a comeback after a short period of extinguishment.
From the perspective of economic data, the overall price operation is low, "CPI rose 0.3% year-on-year in May, and the decline in PPI narrowed to 1.4%. The continued low price environment has squeezed the profitability of enterprises, which is especially unfavorable for enterprises with rigid costs, but it is more favorable to the bond market. Wu Zhaoyin, director of macro strategy of AVIC Trust, told reporters.
In his opinion, macroeconomic fundamentals do not support a significant upward movement in bond yields. This year's economic recovery is weak, and the economic indicators are decent, but the deep-seated problems of the economy are still unresolved. For example, addressing the lack of effective demand and stabilizing the real estate market require a low interest rate environment that does not support a sharp rise in bond yields.
The official manufacturing PMI, released on June 30, was in line with expectations and was in contraction territory for two consecutive months. "This shows that the industrial sector is facing ongoing challenges and that the Chinese government needs to introduce more supportive policies. However, the RMB is under depreciation pressure, especially with a stronger US dollar, and the room for monetary policy easing is limited for the time being. That said, fiscal policy is likely to be the main tool, and the central government will need to issue more debt to boost overall domestic demand in the foreseeable future. Zhou Hao, chief economist of Guotai Junan International, told reporters.
In addition, the strict investigation of "manual interest supplementation" has led to the flow of deposit funds to wealth management products, which has increased the demand for bond allocation. Wu Zhaoyin told reporters that the recent review of the regulator's "manual interest payment" has affected the bank's strategy of absorbing deposits and changed the flow of customers' funds. High-interest deposits, which originally relied on "manual interest replenishment", are no longer attractive, and a large amount of money has flowed out of traditional savings accounts and turned to wealth management, mutual funds or other financial products. In order to maintain relatively stable and high returns, these products continue to increase the proportion of bond allocation, further pushing bond yields downward.
Be wary of long-term bond interest rate riskIt is worth mentioning that the momentum of long-term bonds, which had previously pulled back sharply, was particularly strong, with the 30-year Treasury ETF approaching its previous high, rising from 110 points to near 115, and the yield on long-term bonds recently closed below 2.5% after falling below the MLF rate (2.5%) for the first time on February 28.
Wang Qiangsong, head of the financial research department of Nanyin, previously told reporters that from June 17 to 21, the secondary market trading of long-term bonds was quite active, and funds, brokerages and other products actively longed bonds, and funds bought more than 100 billion yuan of interest rate bonds (more than 7 years) in a single week; Brokerages buy 7~10-year interest rate bonds and reduce their holdings of bonds of other varieties and maturities, insurance companies continue to increase their holdings of long-term bonds, wealth management products increase their holdings of certificates of deposit and credit bonds, and other products actively increase their holdings of long-term bonds and ultra-long bonds.
Wang Ju, head of currency and interest rate strategy for Greater China at BNP Paribas, mentioned in the report that the People's Bank of China (PBOC) had actively guided long-term interest rates into the range of 2.5%~3% to prevent maturity risks. However, the latest 30-year Treasury yield has fallen to around 2.44%, reflecting a shortage of onshore assets due to weak private sector credit demand and local government deleveraging.
According to the reporter's understanding, after the first quarter, many foreign-funded institutions began to be optimistic about the trading strategy of the steepening of the bond yield curve, but with the sharp decline in long-term bond yields, institutions have begun to reduce their positions, but traders are still paying close attention to the attitude of the regulator.
"We have halved our exposure to the steepening of the 5-year and 30-year yield curves, but we still believe that the PBOC wants to maintain a relatively steep curve to maintain exchange rate stability and prevent over-leverage in the bond market. At the same time, the interest rate swap (IRS) curve has also flattened recently due to delays in domestic rate cut expectations. Wang Ju said.
Yicai previously reported that since the beginning of this year, the yield of 10-year treasury bonds has fallen to 2.2%, and the yield of 30-year treasury bonds has fallen to below 2.5%, which has aroused regulatory attention to the interest rate of the bond mayor and the interest rate risk of financial institutions. For example, the position on the mayor side of the bond has changed from "the reasonable range of long-term treasury bonds is 2.5%~3%" to "the reasonable operating range of 10-year treasury bonds is 2.5%~3.0%"; The statement on economic growth has changed from "reasonable economic growth" and "long-term positive fundamentals" to "potential growth rate of 5%"; The expression of treasury bond trading has ranged from "buying and selling treasury bonds may be included in the policy instrument reserve to enrich the liquidity management toolbox" to "selling treasury bonds if necessary".
First Capital previously mentioned that the central bank buys and sells treasury bonds, and it is expected that the trading pool will be mainly 170 billion yuan of ordinary treasury bonds, of which the term structure is not clear. If the central bank sells treasury bonds, it means that the probability of cutting the reserve requirement ratio and interest rates is reduced, and the central bank may also reduce the amount of MLF again to withdraw liquidity. In addition, the continuous issuance of ultra-long bonds is also conducive to the balance between supply and demand, so the probability of a sustained decline of 30-year treasury bonds below 2.5% may be small, and caution is recommended.
Foreign investors increase their positions in certificates of deposit and treasury bonds
As the downward trend in yields has not changed, the enthusiasm of foreign investors to allocate RMB bonds has rekindled.
"Foreign investors' sentiment towards China's bond market has once again turned positive, with increased holdings of government bonds, CDB bonds and certificates of deposit (NCDs)." Wang Ju said.
For example, she mentioned that net inflows into portfolio investments increased significantly in May, mainly due to inflows into bond asset swaps (ASWs), i.e. foreign investment in the form of onshore foreign exchange swap financing in China's bond market. Despite the decline in Chinese bond yields, foreign investors have seen a further increase in returns due to the decline in foreign exchange implied yields. "If central banks are better at guiding bond yields by trading bonds as part of open market operations, then we think higher yields could further attract foreign inflows."
This trend has continued in recent months. As of the end of April, foreign institutions held 4.05 trillion yuan of bonds in the interbank market, accounting for about 2.9% of the total custody of the interbank bond market, according to data released earlier by the Shanghai headquarters of the People's Bank of China. According to the State Administration of Foreign Exchange, foreign investors bought 124.7 billion yuan and 45.1 billion yuan of domestic bonds and stocks in April. This is the eighth consecutive month that foreign institutional investors have increased their holdings of Chinese bonds.
Many traders generally believe that if the follow-up issuance of China's long-term bonds brings a certain correction in bond prices, international investors will still buy the dip.
(This article is from Yicai)