The Rise of Ultra-Long Credit Bonds: The Times Create Heroes###
Since 2024, ultra-long credit bonds have risen rapidly in the bond market and become the focus of the market, and their issuance and demand have shown unprecedented prosperity. Ultra-long credit bonds not only provide investors with rich allocation returns, but also further enhance their trading attractiveness and value in the context of significantly improved liquidity. This article focuses on ultra-long credit bonds with maturities of 10 years and above, and provides investors with comprehensive and in-depth insights to help them make investment decisions through in-depth analysis of their issuance, market, and dynamic changes in supply and demand structure.
1. Release review
In the first half of 2024, the cumulative issuance scale of credit bonds will be nearly 6.9 trillion yuan, of which 502.68 billion yuan will be issued for ultra-long credit bonds with a maturity of 10 years or more, accounting for 7.9%, compared with only 0.9% in the same period last year, and the issuance scale has increased significantly.
Source: Straight Flush iFinD
Zheshang Bank
(Data caliber: The types of credit bonds include short-term financing bonds, medium-term notes, directional instruments, project revenue notes, corporate bonds and corporate bonds; The industry classification adopts YY caliber)
In a low-interest rate environment, the issuance of ultra-long credit bonds increased significantly
Looking back at the issuance of ultra-long credit bonds since 2000, 2024 can be described as an "explosive" growth year for issuance, of which 10-year bonds are the mainstream issuance period in the ultra-long credit bond market, accounting for the main share, and the issuance of ultra-long credit bonds of more than 15 years has increased significantly.
Source: Straight Flush iFinD
Zheshang Bank
The issuance scale of ultra-long industrial bonds still dominates, while the issuance of ultra-Great Wall investment bonds has also shown a strong growth trend, with its additional issuance surging by nearly 20 times. Urban investment enterprises have keenly seized the market opportunity of low interest rates, actively adjusted their strategies, and optimized their financial structures by extending the duration of liabilities.
Source: Straight Flush iFinD
Zheshang Bank
Source: Straight Flush iFinD
Zheshang Bank
Specifically, in the first half of 2024, the distribution of different types of ultra-long credit bonds is shown in the figure below, and compared with urban investment, urban investment bonds account for a higher proportion of credit bonds above 15Y.
Source: Straight Flush iFinD
Zheshang Bank
The overall credit rating is high, and the proportion of ultra-long credit bonds issued by relatively weakly qualified entities has increased
From the perspective of the implied rating of Chinese bonds, the credit rating of urban investment bonds is higher than that of industrial bonds, and the AAA+ rating of urban investment bonds is relatively high, while most of the industrial bonds are AAA and AA+ ratings, and there are fewer AAA+. Judging from the YY rating, the issuer's qualifications are mostly 4+ and above, and the issuance scale of 4 and below is less.
Source: Straight Flush iFinD
Zheshang Bank
Note: In the YY classification, China Railway is an urban investment entity with a rating of 1, and issued 70 billion ultra-long credit bonds in the first half of the year
Source: Straight Flush iFinD
Zheshang Bank
In the first half of 2024, the number of first-time issuances of ultra-long credit bonds by relatively weakly qualified entities increased significantly. In the initial issuance of ultra-long industrial bonds, there were 17 entities with YY rating of 4 and below, accounting for 37.8% of all the initial issuance of ultra-long industrial bonds in the first half of the year, mainly coal and trading entities in central provinces, including Shaanxi Coal Chemical, Shanxi Coking Coal, Beijing Shounong, Shanxi Nonferrous Metals, Hebei Trading Investment, Shandong Road and Bridge, etc., of which the lowest YY rating is China Logistics, with a YY rating of 6, and issued 2 10Y bonds with a scale of 1 billion yuan each; In the initial issuance of super Great Wall investment bonds, there are 14 entities with YY rating of 4 and below, accounting for 58.3% of all the first half of the year, such as Jiangxi Railway Airlines, Chang Gaoxin, Yangzhou City Holdings, Jiangxi Water Investment, etc., and the lowest YY rating is Changxing Urban Construction, with a YY rating of 6, and the issuance of 1 10Y term bond with a scale of 500 million yuan.
List of the top 20 ultra-long credit bond issuances
In the first half of 2024, a total of 142 entities will issue ultra-long bonds, of which the top 20 will have a total issuance scale of 283.8 billion yuan, accounting for 56.46% of the total issuance scale, and the list is as follows:
The new issuance of ultra-long industrial bonds is concentrated in the industrial holding industry, and enterprises are willing to lock in long-term capital costs and replace past short-term debts in a low-interest rate environment. In addition, the amount of public power and transportation bonds issued is also relatively large, considering that the introduction of public price increase policies such as electricity reform and the extension of road operation rights has improved the industry's profitability and cash flow expectations, the capital demand of such industries is also relatively large.
2. Supply-side perspective: issuers' willingness to replace debt is high, and the head effect is obvious
Combined with the above, the issuance of ultra-long-term credit bonds in the first half of 2024 has increased significantly, and the issuance scale has exceeded 8 times the issuance scale in 2023. From the perspective of initial issuance, the proportion of initial issuers in all issuers far exceeds the historical norm.
In the first half of 2024, there will be 45 issuers of ultra-long industrial bonds, accounting for 48.9% of the total number of issuers of ultra-long industrial bonds, and the total issuance of ultra-long industrial bonds will be 92.26 billion, accounting for 28.8% of the total issuance scale of ultra-long industrial bonds; There were 24 issuers of the Great Wall Investment Bonds, accounting for 48% of the total number of issuers of the Great Wall Investment Bonds, and the total issuance of the Initial Offering of the Great Wall Investment Bonds was 30.33 billion, accounting for 16.77% of the total issuance scale of the Great Wall Investment Bonds.
Among the issuers of ultra-long credit bonds in the first half of the year, China Chengtong issued a large number of bonds, with a large issuance scale and a strong representativeness. Chengtong is one of the two pilot units of state-owned capital operation companies identified by the State-owned Assets Supervision and Administration Commission, and its main business directions are fund investment, equity management, asset management, financial services and the cultivation of strategic emerging industries. In the past three years, China Chengtong has expanded its balance sheet at a high speed, and there have been a large number of cases of equity transfer and mergers and acquisitions of state-owned enterprises. However, judging from the statements, the capital expenditure has not increased, there is a large amount of expenditure on investment cash, the new business has not yet formed a profit growth, and the demand for funds is large.
Source: Straight Flush iFinD
Zheshang Bank
According to the statement in the prospectus of Chengtong in the first half of this year, the 66 billion ultra-long credit bonds are basically used for the repayment of principal and interest on debts in 2024, and the purpose description in the prospectus of the corresponding debts is mainly used for equity investment to make up the subscription amount in addition to repayment of principal and interest and supplementing necessary working capital.
Source: Straight Flush iFinD
Zheshang Bank
From the perspective of maturity, the maturity of bond issuance in 2021-2023 is often 3Y and 5Y, and there will be bond maturity one after another, and the demand for repayment of principal and interest will be sustainable in the next few years; From the perspective of bond issuance cost, the average interest rate of 5Y and 7Y medium- and long-term credit bonds is around 3.45%, while the average interest rate of 10Y, 15Y or even 30Y ultra-long credit bonds in the current low interest rate environment is only about 3.15% (weighted by issuance size), and issuers are more willing to carry out debt swaps to lock in long-term capital costs.
The figure below shows the progress of Chengtong's debt swap, the green part is the part due in 2024, of which the bonds due in the first half of 2024 are 20.2 billion; Another $43.5 billion bonds will mature in the second half of 2024; The yellow part is the size of debt maturing between 2025 and 2026, totaling $50.3 billion.
Source: Straight Flush iFinD
Zheshang Bank
For other ultra-long-term credit bond issuers, the funds in the fundraising report are mainly used for repayment of principal and interest, replenishment of working capital and production expansion. From the perspective of the cost of existing debt, for entities with good qualifications and the ability to issue ultra-long-term credit bonds, the potential willingness to further debt swap in the future is higher.
3. Demand-side perspective: investors undermatch high-interest assets, and trading demand rises
Overall, in the past six months, the market has been in a structural asset shortage, and the absolute yield has continued to decline.
Source: Straight Flush iFinD
Zheshang Bank
Asset management institutions continue to buy, and the duration of product income constraints is the only way to go
Funds with a scale of more than 10 billion yuan in the whole market bond funds have been screened, and the average return in the past year is around 3.8%; According to the Straight Flush data, the median yield of the all-market bond fund is around 3.4%, and the average yield of wealth management is around 3%. At present, the yield of China Bond AAA credit bond 10Y has fallen to around 2.5%-2.6%, and asking for income from duration has become the main choice at present.
In June, the expected annualized rate of return of new wealth management products, 2%-3% (inclusive) and 3%-5% (inclusive) accounted for almost half of the number of issued products, while in the same period, 10Y treasury bonds fluctuated around 2.2%, short-term financing around 2.1%, medium notes 3Y to 5Y were mostly around 2.5%, and 10Y credit bonds could be issued around 2.7%. Taking the new "XX Closed Fixed Income Enhanced XXX Period 1 Year" product issued by a bank in late June as an example, the performance comparison standard is an annualized rate of return of 3.5%, and the actual annualized rate of return is 3.39%. In the face of the current situation of asset shortage, the long-term bond market has been stimulated by the rigid demand for high-coupon bonds, and the only way for this type of wealth management products to adopt a long-term strategy to allocate credit bond bottom positions.
The trend of the term spread of ultra-long treasury bonds is highly similar to that of ultra-long credit bonds, and the trading attributes are highlighted
Since the beginning of the year, the total number of transactions of credit bonds above 5Y has increased from 30+ to 200+ in terms of the number of weekly broker transactions of credit bonds above 5Y; The absolute value of the number of transactions from 5Y-7Y increased slightly, and the proportion decreased; As an alternative product, the number and proportion of 10Y new bonds have increased significantly, from less than 10% to 40-50%, highlighting the trading attributes of 10Y credit bonds.
Using the comparison of the 30Y-10Y treasury bond maturity spread and the AAA credit bond 10Y-1Y maturity spread, it can be found that since 2023, the guidance of the treasury bond maturity spread on the trend of credit bond maturity spread has been strengthened, or even highly similar. In the context of 30Y treasury bonds as a long-term interest rate bond trading variety, 10Y credit bonds have similar trading attributes.
Source: Straight Flush iFinD
Zheshang Bank
Fourth, interest rate spread analysis: buying sentiment is still high, and there is little room for further compression of interest rate spreads
Under the weak fundamentals, the allocation demand is still tenacious, and the income may be relatively stable in a volatile environment
Insurance companies, as continuous buyers of ultra-long bonds, have weakened their buying power marginally recently; In recent months, the fund's secondary purchase volume has been weak year-on-year, considering the weak stability of the debt side of the fund company, or more through the primary market participation; Due to the high income requirements and flexible transactions, securities firms actively participate in ultra-long bond investment transactions, and the recent returns from the primary and secondary transactions of ultra-long bonds are obvious; Since the ban on manual interest payment by banks in April, banks have continued to buy ultra-long bonds in a net selling state, and the net purchase volume has increased significantly in July. Overall, the main buyers of ultra-long bonds, non-bank institutions, still have strong buying power.
Credit spreads are extremely compressed, and the term structure of 10Y-5Y credit spreads is inverted
Using the analysis of the credit spread trend of 5Y, 10Y AAA credit bonds and CDB bonds, it is found that since 2023, the credit spreads of medium and long-term credit bonds have continued to narrow. The credit spread of 10Y credit bonds has now fallen to the range of 18BP-21BP, which is at the 0-4% quantile since 2015, and there is limited room to further compress credit spreads and earn capital gains.
From the perspective of the term structure of credit spreads, the credit spreads of 10Y AAA credit bonds are higher than the credit spreads of 5Y AAA credit bonds in most cases, and the gap between the two has been gradually narrowed since 2023 (gray dotted line in the chart), and has now broken through 0, forming a continuous inversion, which is the first time since 2015, indicating that the interest rate spread between 10Y and 5Y AAA credit bonds is basically reflected by the term spread of interest rate bonds of the same maturity, and the market has converged on the credit risk premium of 5Y and 10Y. It is speculated that the main reason is that in order to match the income requirements of the liability side, institutions overweight 10Y ultra-long bonds.
Source: Straight Flush iFinD
Zheshang Bank
Term spreads are gradually declining to record lows, and long-end bull markets are rare in history
From the perspective of historical experience, there is a negative correlation between the fund price and the maturity spread of ultra-long credit bonds, and the logic behind it is that the fund price has a greater impact on the short and medium end, while the ultra-long bond is usually an allocation variety and is relatively insensitive to the capital price.
As shown in the figure below, this law has been effective for most periods since 2015, and from 2015 to the first half of 2024, the correlation coefficient between the 10Y-1Y maturity spread of AAA credit bonds and R007 has been calculated to be -0.57, which is in line with the logic that the cost of funds affects the maturity spread through the short-term interest rate.
Source: Straight Flush iFinD
Zheshang Bank
Looking back on the historical special market, since 2010, there have been three times when the maturity spread of 10Y AAA credit bonds has been extremely compressed, namely: at the end of 2013, the short-end interest rate of money shortage fermented and the impact on the long-end was relatively lagging behind. From the end of 2014 to the beginning of 2015, the CSI Deng incident triggered a wave of fund redemptions, the fund sold highly liquid bonds for cash, and the interest rate spread of ultra-long bonds was passively compressed. From the end of 2016 to 2017, the monetary policy turned to tighten liquidity, the short-end pressure continued in the context of deleveraging, the bond market corrected rapidly, the interest rate of 3Y AAA urban investment bonds rose rapidly, and the term spread was compressed. In summary, the background is mostly the rapid rise in short-term interest rates due to tighter liquidity, which leads to the passive compression of ultra-long bond maturity spreads, all of which are in the bear market period or the bond market correction scenario.
The compression of the current round of ultra-long credit bond maturity spreads comes from the continuous bond bull market, which is not completely consistent with the above law. In the absence of significant changes in the cost of funds, the credit bond maturity spread has fallen rapidly, mainly because the current round of market is dominated by long-term interest rate changes, and there may be room for continued compression in the future, but there is not much space, and the willingness of regulatory regulation of the yield curve shape needs to be considered.
Source: Straight Flush iFinD
Zheshang Bank
Fifth, the outlook for the market
As the so-called "the times create heroes, heroes are also timely", as the yield of the bond market continues to decline, the market's attention to ultra-long-term credit bonds is also increasing.
Given that the low interest rate environment is difficult to reverse in the short term, issuers continue to show strong willingness to swap debt, and it is expected that the issuance of ultra-long-term credit bonds will remain high and is expected to continue this trend.
In the first half of the year, the ultra-long-term credit bond market was actively traded, which not only led to a significant increase in the activity of ultra-long-term credit bonds, but also attracted the participation of a large number of new institutions.
In a bull market or mildly volatile market environment, ultra-long credit bonds have a better holding experience, which can not only enjoy higher coupons, but also obtain spread income; But in a sharply falling bear market, its liquidity could shrink sharply, and there are risks.
At this stage, the valuation of high-quality ultra-long-term credit bonds may refer to the 30-year treasury bond as a benchmark, and the market preference is obviously inclined to provide ultra-long-term credit bonds with higher absolute coupons, and it is expected that there is limited room for further compression of credit spreads and maturity spreads.
Regulators have repeatedly warned about duration risks, and with the possible adjustment of urban investment and financing policies, investors need to remain vigilant and pay close attention to possible unexpected changes in order to cope with potential market volatility.