Report Title: Guiding Long-Term Bond Rates Up: Why? Can? -- July 7, 2024 Interest Rate Bond Observation
Report release date: July 7, 2024
Analyst: Zhang Xu Practicing Certificate No.: S0930516010001
1. Why guide the interest rate of long-term bonds to rise?
Risk prevention and control is the eternal theme of financial work. Recently, the management of the vast majority of financial institutions has paid special attention to prudent operation, not rushing for quick success, and pursuing steady and long-term development, and preventing problems before they occur. However, there are many investment traders in the bond market, and it is inevitable that the operating style of individual traders will drift from the requirements of the management. For example, some traders may over-invest in long-term bonds in order to "make quick money" and "roll ranking".
It is true that when the bond market is doing well, it is easy to reap good returns on investing in long-term interest rate products. But we should also note that the price of any asset can go up and down. In particular, if some assets rise significantly more in the early stage, the valuation will be more expensive, and the risk of falling in the later stage will be correspondingly greater.
In fact, the bond market has been on the high side of valuation in recent months. The current (note: July 5, 2024) 10Y Treasury yield is 2.28%, and the spread with MLF is -22bp, which is at the lowest level since 2016. The spreads between 10Y and 30Y Treasury bonds and DR007 in the second quarter of this year were 40.7bp and 63.9bp, respectively, which is also at the lowest level since 2016.
At the end of a bull market, traders' risk awareness will generally be less than usual, and different traders will interact with each other, which may lead to excessive downward yields. Historically, for example, in the fourth quarter of 2022, a rebound in low bond yields is likely to adversely affect the net value and size of the underlying accounts, and even form mutually reinforcing feedbacks between the two, affecting the sound operation of the bond market. Obviously, when there are signs of excessive decline in yields, it is necessary for the financial management department to correct and block the accumulation of market risks in a timely manner.
In addition, the current yield curve is relatively flat. We believe that every effort should be made to maintain a normal, upward-sloping yield curve and provide positive incentives for economic agents, which is generally conducive to sustainable economic and social development. Some investors have questioned why China can't have a downward sloping yield curve for U.S. Treasury bonds. In fact, the current downward slope curve and the previous Fed's QE operation are the result of helplessness, and they are not objects that we should learn from.
2. Can it guide the interest rate of long-term bonds upward?
Since April this year, the central bank has carried out many expected guidance on the trend of long-term bonds and ultra-long-term bonds through the Financial Times and other media, and successfully stopped the rapid downward trend of yields since the beginning of this year. On July 1, the Open Market Business Operation Office of the People's Bank of China issued an announcement announcing that "the People's Bank of China has decided to carry out treasury bond borrowing operations for some primary dealers in open market business in the near future". Recently, the People's Bank of China (PBoC) has signed bond borrowing agreements with several major financial institutions. At present, the financial institutions that have signed agreements have hundreds of billions of yuan of medium- and long-term treasury bonds available for lending. The People's Bank of China (PBoC) will borrow treasury bonds on credit with no fixed term, and will continue to borrow and sell treasury bonds depending on the operation of the bond market.
It is not difficult to see that the central bank's policy of guiding long-term bond yields upward is becoming more and more vigorous and effective. On July 5, the yields of 10Y and 30Y treasury bonds have risen by 7.0bp and 8.5bp respectively from the trading day before the announcement on July 1 (June 28), indicating that the market generally believes that the central bank can "match words with deeds" at this time.
Of course, as mentioned above, there are many investors in the bond market, and it is inevitable that some investors at this stage believe that the central bank's ability to guide long-term bond yields upward is insufficient. For example, some investors believe that the hundreds of billions of dollars of bonds are not enough to fill the gap between supply and demand in the market.
In our view, the relationship between supply and demand in the market, as well as the so-called gaps, has always been dynamic. Once yields begin to rise, the demand for long-term bonds in the market will automatically fade, and the central bank will not need to sell too much to achieve its policy objectives. Moreover, the central bank's bond sales and other operations and expected guidance corroborate and synergize, enhancing the credibility of monetary policy and reducing the scale of actual operations required by the central bank. (Note: This is similar to how the central bank can guide interest rates such as DR to fluctuate around the OMO rate with only a small amount of OMO.) ）
Taking a step back, these hundreds of billions of yuan are only the scale of the "current" signed agreements that can be borrowed, and the scale of borrowing can still be increased in the future if needed. Taking a step back, it is clear that the central bank has a number of other tools and measures at its disposal in addition to selling bonds in the open market.
In fact, in the final analysis, it is our article in "How to Understand the Central Bank's Treasury Borrowing?" ——The sentence repeatedly emphasized in the July 1, 2024 Interest Rate Bond Watch: "The attitude of the regulator is more critical than the use of specific tools." "At this time, following the guidance of the central bank should be the most advantageous choice for investors.
3. Risk warning
Irrational expectations trigger rapid market volatility.
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