On the first day of the second half of the year, the People's Bank of China (central bank) suddenly dropped a "depth bomb" that shook the market, and its impact was so far-reaching that it quickly caused ripples in the bond market.
On July 1, the central bank's official website published a brief announcement on open market operations, which was extremely concise but contained significant market-oriented information that the central bank was about to borrow treasury bonds from primary dealers in open market operations, an act known in the industry as "borrowing bonds". The "bonds" here refer to treasury bonds, mainly long-term treasury bonds issued by the central government, as a symbol of national credit, treasury bonds have always been one of the most stable investment varieties in the financial market.
As soon as this news came out, the bond market reacted strongly immediately.
On the day, yields on 10-year and 30-year Treasuries rebounded rapidly during the session, with the 10-year yield rising to 2.24% from 2.2% previously, while the yield on 30-year Treasuries also climbed to 2.45% from 2.43%. This change not only demonstrates the market's sensitivity to the actions of the central bank, but also indicates a subtle adjustment in the market's liquidity and investment preferences.
Why did the central bank's move to borrow bonds trigger an intraday rise in Treasury yields? The logic behind this is not complicated, but it has a profound impact on market expectations and behavior. To put it simply, the market has keenly picked up on the central bank's next move to sell borrowed Treasury bonds. In financial markets, selling Treasury bonds means that the supply of Treasury bonds in the market will increase, which in turn will push the price of Treasury bonds down, and the price of Treasury bonds moves inversely to yields, so yields rise.
It is worth noting that some self-media have erroneously interpreted this open market behavior of the central bank as "releasing water", that is, increasing market liquidity.
This is a clear misunderstanding of the central bank's operational intentions. In fact, when buying treasury bonds, the central bank is indeed releasing money into the market, but when selling treasury bonds, the central bank is recovering money, so it is "collecting water" rather than "releasing water". Of course, since the treasury bonds sold by the central bank are borrowed and need to be returned to primary dealers in the future, in the long run, borrowing and selling bonds will have a relatively limited impact on the overall liquidity of the market, and it is more of a short-term market adjustment means.
So why would the central bank engage in a borrowing behavior that appears to be shorting Treasury bonds? The deep-seated reason behind this lies in the central bank's early warning and prevention of potential risks in the treasury bond market.
In recent years, with the complex and volatile global economic environment and the deepening reform of the domestic financial market, the treasury bond market is also facing unprecedented challenges. Especially in the current market environment, traditional investment channels such as stocks and real estate have performed poorly, and "asset panic" has spread throughout the market, and a large number of funds have poured into the treasury bond market to seek hedging, resulting in rising treasury bond prices and low yields. A market reversal, such as a fall in the price of government bonds due to domestic interest rate hikes, could trigger systemic risk.
The reason for the collapse of Silicon Valley Bank last year was that the bank bought a large number of Treasury bonds when the price of U.S. Treasury bonds was low, and then the Federal Reserve's crazy interest rate hikes led to a sharp rise in U.S. bond yields and a sharp drop in prices.
As the regulator and stabilizer of the financial market, the central bank will naturally not allow the risk of the financial system to accumulate. However, due to the law that the central bank cannot directly buy treasury bonds in the primary market, the central bank can only adopt the strategy of borrowing bonds and then selling them, so as to circumvent legal restrictions and achieve the purpose of regulating the market.
Through this operation, the central bank aims to guide the yield and price of government bonds back to a reasonable range, prevent the market from overbuying and blindly following the trend, so as to avoid the continuous accumulation of risks.
For ordinary investors, the central bank's borrowing has also had a real impact, especially those who are interested in wealth management products and bond funds. As you may have already felt, the net value of investment products fell on July 1. This is because whether it is a wealth management product or a bond fund, a large number of bonds are often allocated to its underlying assets, and Chinese bonds account for a very important proportion. Therefore, when the price of government bonds falls, the net value of these investment products also decreases.
For investors who have already bought earlier, they have accumulated a certain amount of excess returns in the early stage, and the short-term decline in net value may not have much impact. However, for investors who have just entered the market recently, they may face the embarrassing situation of buying at a high point, and they need to be prepared to lose money for a while.
However, the decline in China's interest rate pivot is a long-term trend, and treasury bonds, wealth management products and bond funds with treasury bonds as the main underlying assets still have high investment value. Especially when the United States begins to cut interest rates and the interest rate gap between China and the United States gradually narrows, the net value of these investment products is expected to continue to rise.
In addition, the central bank's borrowing behavior also provides us with an important enlightenment. In the financial market, any investment behavior needs to be treated with caution and cannot blindly follow the trend. Especially in the face of market hotspots and investment opportunities, we should keep a clear mind and rational judgment, and do a good job in diversified asset allocation.
At the same time, we should also pay close attention to the policy dynamics and market changes of the central bank, so as to adjust our investment strategies and asset allocation plans in a timely manner to cope with possible market fluctuations and risk challenges.