At noon on July 1, the central bank announced the borrowing operation of treasury bonds, and affected by relevant news, treasury bond futures dived across the board in the afternoon. The central bank has a long history of regulating the bond market in Europe and the United States, and has invented a series of tools.
The central bank's treasury bond borrowing operation landed //
On July 1 (Monday), the central bank announced that in order to maintain the stable operation of the bond market, on the basis of prudent observation and evaluation of the current market situation, it was decided to carry out treasury bond borrowing operations for some primary dealers in the open market in the near future.
After the news was released, Treasury bond futures dived across the board.
As of the close of trading on July 1, the 30-year main contract closed down 1.06%, the 10-year main contract closed down 0.37%, and the 5-year main contract closed down 0.24%
Ultra-long-term Treasury ETFs tumbled. As of the close of trading on July 1, the Bosera SSE 30-year treasury bond ETF closed down 1.06%, and the Pengyang China Bond -30-year treasury bond ETF closed down 1.1%.
The yield on the active interbank interest rate bond rebounded sharply, with the yield on the 30-year Treasury bond active bond 230023 rising 5.15bp to 2.4750% and the yield on the 10-year Treasury bond 240004 rising 3.95bp to 2.2725%.
How to understand the borrowing operation of central bank bonds? //
The central bank's treasury bond borrowing operation refers to the treasury bond borrowing activities carried out by the People's Bank of China for some primary dealers in the open market in order to maintain the stable operation of the bond market. Specifically, the central bank adjusts interest rate levels and economic activity by borrowing Treasury bonds to influence the supply of funds in the market.
At present, the central bank's means of injecting liquidity are mainly pledged repo transactions, and treasury bonds are only collateral in repo transactions, while treasury bond transactions involve changes in ownership.
Shanxi Securities said that compared with the pledged repo transactions in the past, the central bank's treasury bond trading can effectively supplement short-term liquidity injection, improve the central bank's ability to adjust the yield curve, and enhance the liquidity of the treasury bond market, which is a major breakthrough in the process of marketization of interest rates in the mainland.
CITIC Securities said that the central bank's move means that it may carry out treasury bond sales in the open market in the near future. At a time when the yield on 10-year Treasury bonds has fallen to a record low, selling Treasury bonds is conducive to stabilizing long-term bond interest rates and guarding against interest rate risks.
The agency also said that there are no legal barriers for the central bank to buy and sell government bonds in the secondary market and are conventional monetary policy tools. Before the 2008 financial crisis, the Federal Reserve would also buy and sell Treasury bonds and repurchase operations at the same time.
What are the tools used by central banks in Europe and the United States to intervene in the bond market? //
The central bank has a long history of regulating the bond market in Europe and the United States, and has invented a series of tools.
ECB's OMT and TP
On September 6, 2012, his predecessor Mario Draghi announced that the European Central Bank (ECB) would launch an "OMT (Outright Monetary Transaction)" program with strict conditions to purchase unlimited amounts of sovereign bonds of eurozone member states. Unlimited offsetting purchases of Treasury bonds for the Eurozone secondary government bond market, with a maturity of less than 3 years.
A prerequisite for the OMT program is that the country in question must formally apply for the use of the European Rescue Fund EFSF/ESM and meet the conditions attached to the Relief Fund.
The OMT program will depress the short-term Treasury yield curve and reduce the cost of financing. In particular, it has played a role in reducing the cost of debt for countries such as Spain and Italy, but it has also set a precedent for the ECB to buy government bonds from the secondary market.
Prior to the launch of the OMT, the ECB issued loans to eurozone countries with debt crises through EFSF, intervened in the primary market, intervened in the secondary market, participated in the restructuring of financial institutions, etc.
In July 2022, the European Central Bank announced a new bond market control tool: TPI (Transmission Protection Tool). The ECB can use the TPI tool to buy medium- to long-term (1 to 10 years) government bonds in the secondary market. If appropriate, corporate bonds can also be purchased under the TPI.
However, at the time, the ECB said at the time that whether and when the TPI instrument would be activated and the size of bond purchases would be assessed "at the discretion of the management committee". It is widely expected that the ECB will use the TPI tool this month.
In addition to the OMT and TPI, the ECB's financial toolkit includes the Asset Purchase Program (APP), the Pandemic Emergency Asset Purchase Program (PEPP), the Long-Term Directed Refinancing Operation (TLTRO), and the Pandemic Emergency Long-Term Refinancing Operation (PELTRO).
The Fed's OMOs and TSLF
OMOs, often translated as open market operations, refer to the Federal Reserve's purchase or sale of securities (typically U.S. Treasuries and mortgage-backed bonds) from its member banks to regulate the money supply.
A TSLF, often translated as a long-term securities lending facility, or long-term securities lending facility, refers to the lending of U.S. Treasuries to the New York Fed's primary dealers in exchange for other eligible collateral (investment-grade corporate bonds, municipal bonds, MBS, ABS, etc.). The long-term securities lending facility has a term of 28 days, allowing traders to convert less liquid securities into easily tradable U.S. government bonds.
In terms of corporate bonds, the Fed relies on two instruments: PMCCF and SMCCP.
PMCCF, often translated as Primary Market Corporate Credit Facility, or Primary Market Corporate Credit Facility Facility, is used to support new bond issuance and loan financing. The PMCCF is primarily aimed at investment grade companies and offers 4-year bridge financing. This tool was established by the Federal Reserve in 2020.
SMCCF, commonly translated as Secondary Market Corporate Credit Facility, or Secondary Market Corporate Credit Facility, is the primary purchase of secondary market bonds issued by investment grade companies, along with the purchase of U.S.-listed ETF funds that invest in U.S. investment-grade bonds. This tool was established by the Federal Reserve in 2020.
The Federal Reserve has a number of financial innovation tools, including AMLF (Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility), MMIFF (Money Market Investor Financing Facility), CPFF (Commercial Paper Credit Facility), and TALF (Term Asset-Backed Securities Credit Facility) established in 2008; MMLF (Money Market Mutual Fund Liquidity Facility), MSLP (Main Street Lending Program), and MLF (Municipal Liquidity Facility) were established in 2020.
What's the difference? //
According to CITIC Securities Research, the trading of treasury bonds by the People's Bank of China may be more similar to the trading of treasury bonds under the framework of the Fed's conventional monetary policy before 2008, rather than the QE operation after the 2008 financial crisis.
The biggest difference is the magnitude of the Treasury bond traded. The PBOC's treasury bond trading order will be much lower than that of the US QE operation, and while increasing the purchase of treasury bonds, it will appropriately reduce the operation of other monetary policy tools such as MLF to ensure that the overall base money supply remains at an appropriate level. Central bank purchases of Treasury bonds may weaken the role of MLF in the provision of base money.
Shanxi Securities pointed out that the central bank's treasury bond trading is a two-way trading behavior, which is fundamentally different from the quantitative easing (QE) and yield curve control (YCC) of overseas central banks. Since April, the central bank has been predicting to the market that it will participate in Treasury bond trading in the next tier market, raising concerns about whether the central bank will follow the example of the Federal Reserve and other institutions for QE and YCC. In fact, the trading of treasury bonds in the secondary market complies with mainland laws and regulations, and can be used as a tool for the central bank to provide liquidity on a daily basis, and can also strengthen the central bank's control over the yield curve, guide market expectations, and keep interest rates within a reasonable range.
The agency said that the unconventional monetary policy tools used by overseas central banks are the helpless move of the failure of traditional monetary policy tools and the target policy interest rate approaching the lower bound of zero interest rates; The mainland's monetary policy still has a lot of room for maneuver, and traditional tools such as "interest rate cuts" and "RRR cuts" still have use value, and the central bank does not need to use large-scale treasury bond purchases to inject liquidity into entities. The announcement of the borrowing operation also shows that the transaction of treasury bonds is a two-way transaction, and some of the unnecessary inferences about the central bank's "water release" should be broken.
For the outlook of the bond market, Shanxi Securities said that the announcement of the central bank's borrowing of treasury bonds can be regarded as a continuation of the previous expectation management, and can also be regarded as a warm-up for the formal normalization of trading treasury bonds. When the central bank borrows treasury bonds and sells them in the secondary market, it will put upward pressure on long-term yields, reflecting the central bank's determination to control long-term interest rates, maintain the stability of the bond market and financial system, and guard against systemic risks. Combined with the central bank's repeated reminders on long-term yields, medium and long-term interest rates may be corrected, and it is necessary to pay close attention to the implementation of the central bank's follow-up treasury bond transactions. Considering that the central bank gives a reasonable range for the 10-year treasury bond yield, the subsequent bond market may fluctuate in a certain range, and the downside of medium and long-term interest rates is narrowing.
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