The author of this article: Chen Xi, chief fixed income officer of Kaiyuan Securities
During the peak period of local bond issuance, funds are often looser
The market’s inertial understanding believes that during the peak period of local bond issuance, funding interest rates may rise because of the issuance of local bonds. Payments will siphon market funds and consume liquidity in the inter-bank market, leading to tight funding and rising funding rates.
On the contrary, historical experience shows that during the peak period of local bond issuance, funds are often looser. For example, during periods of heavy issuance of local bonds from April to August 2018, the second quarter of 2019, May 2020, and June to July 2021, interest rates in the capital market have all seen sharp declines.
We believe that the main reason why this subjective perception deviates from reality is that the central bank is the supplier of funds . The central bank can adjust the tightness of the capital market through many ways such as open market operations and profit handovers, and adjust the capital interest rate Maintaining it at the level it wants, the easing or tightness of funds in the market is largely controlled by the central bank, rather than the market's supply and demand for funds. Although logically speaking, the centralized issuance of local government bonds will lead to a tightening of the margin of funding to a certain extent, the easing of funding mainly depends on the will of the central bank.
During the peak period of local bond issuance, a loose financial environment is not only more conducive to the issuance of local debt , but at the same time, the peak period of local bond issuance is often a period of counter-cyclical adjustment. Low funding interest rates can also alleviate the market pressure due to local debt payments. The anxiety caused by the tightening of funds sent a signal to the market to maintain loose funds.
The central bank mentioned at the financial statistics press conference in the first quarter of 2021 that "will provide a suitable liquidity environment for government bond issuance" . Therefore, the central bank has reason and motivation to suppress capital market interest rates during this period. to low .
Figure 1: During the peak period of local bond issuance, capital interest rates tend to fall instead of rising.
The recent slow convergence of capital interest rates may be due to the peak period of local bond issuance.
html Since mid-April, capital market interest rates have fallen rapidly, and DR001 has It dropped from about 2% in March to about 1.3% and remained low. It rose slightly in June and then remained at the 1.4% level, without further convergence.
Why is the capital interest rate still hovering at a low level recently without obvious convergence? We believe that this phenomenon occurred precisely because of the peak issuance of local bonds.
In order to stabilize growth in the second half of the year, the central government has made it clear on many occasions that new special bonds in 2022 need to be issued before the end of June. Due to the substantial front-loading of special bond issuance, special bond issuance increased in May and June. It began to accelerate significantly in the middle of the month, and the single-week issuance scale hit a new high in two years. As of June 24, the net financing amount of local government bonds in that month had reached 1,488.313 billion yuan, the highest value since 2017.
As mentioned above, during the peak period of local bond issuance, capital interest rates tend to remain loose due to the "protection" of the central bank's monetary policy. Therefore, we believe this is the main reason for the current slow convergence of capital interest rates.
Figure 2: The recent capital interest rates have remained low and hovering (unit: %)
As the peak period of special bond issuance ends, the subsequent capital market interest rates may rise
We believe that the recent capital market interest rates are likely to rise, mainly for the following four points.
First, the issuance of special bonds is coming to an end and no longer needs the support of a low capital interest rate environment.
Since special bonds need to be basically issued before the end of June, this means that the peak of local special bond issuance will basically end next Thursday. After the special bond issuance is completed, it will no longer need the support of a low capital interest rate environment, and the central bank’s capital investment may Margins tighten. In addition, as the special bonds are put into use, it will also simultaneously stimulate the real economy's demand for funds.Therefore, the combination of the two factors is expected to push up capital market interest rates.
Second, based on historical experience, the loosening of funds often does not last more than three months.
Looking back at previous periods of loose funding since 2018, there have been four periods since 2018 in which the funding interest rate was significantly lower than the policy interest rate, which generally lasted for 2 to 3 months.
From December 2018 to January 2019, funds were invested to ensure the capital demand for the New Year. This round of funding easing lasted for about 66 days; during the Baoshang Bank incident from May to July 2019, this round of funding easing lasted for about 55 days; in 2020 From March to May, when the epidemic hit, this round of financial easing lasted for about 78 days; from December 2020 to January 2021, during the Yongmei Incident, this round of financial loosening lasted for about 67 days.
This round of funding easing began in April 2022 and has lasted for nearly three months. Based on past historical experience, this round of funding easing is likely to end in July.
Third, the current pledged repurchase turnover is too high, and the central bank may tighten liquidity at the margin to control leverage levels.
html Since 14 months, the pledged repurchase transaction volume has remained high. On June 23, the transaction volume reached 6.42 trillion, the highest level since records began. The pledged repurchase transaction volume is at a historic high, which reflects the current situation. The bond market is adding leverage and sentiment continues to heat up to increase returns. At the same time, excessive trading volume may also lead to idling of funds.
Increased leverage and potential idling of funds will increase the possibility of financial systemic risks. Based on past experience, in order to control the excessive increase in leverage in the inter-bank market, the central bank may tighten liquidity at the margin to control the scale of repurchases, and interest rates in the capital market will also rise accordingly.
Figure 3: Pledged repo transaction volume has reached a record high (unit: 100 million yuan)
Fourth, the overall inversion of interest rates in China and the United States has also increased the difficulty and pressure of maintaining low funding rates.
U.S. bond spreads and capital spreads have inverted in April and June 2022. In response to the continued high inflation in the United States, if the Federal Reserve further raises interest rates at the July interest rate meeting 50 or 75bp, which will lead to an inversion of Sino-US policy interest rates.
At present, the country is still facing great pressure to stabilize growth, and the central bank is unlikely to follow the Federal Reserve's pace in raising interest rates. However, against the background of a comprehensive inversion of interest rates in China and the United States and continuing to widen, money market interest rates continue to be lower than the policy interest rate, maintaining Low levels will increase capital outflows and pressure on RMB depreciation, so we believe that money market interest rates are unsustainably lower than policy rates.
Figure 4: China and the United States 2Y and 10Y Treasury bond yields have been inverted since April (unit: %)
Figure 5: China and the United States money market interest rates have been inverted since June (unit: %)
The rise in funding rates means that the money market The return of interest rates to normalization rather than the tightening of monetary policy
The short-term excess liquidity is difficult to sustain. The subsequent rise in funding interest rates may be a high probability event, and the funding level may converge after the peak period of local debt issuance. But we do not think this means the central bank’s monetary policy is tightening. On the contrary, we think it is the central bank’s normalization adjustment to end the abnormal state of money market interest rates far below the policy interest rate and return the money market interest rate to fluctuate around the policy interest rate. .
Regarding the financial aspect, if June is "should it be tight or not", July may be "should it be loose or not".
Regarding the bond market, I reiterated the "last bond market selling point in 2022" proposed at the end of May, and will continue to watch "bear flat" in the future.
For interest rate bonds, affected by overseas interest rate hikes, the constraints of monetary easing have been continuously strengthened. Stimulated by the stable growth combination of "widening credit + widening finance + widening real estate", recent economic data have improved across the board. With the funding situation With the convergence of bond market yields facing further upward pressure, we still recommend using short-duration strategies to reduce portfolio duration .
Risk warning: policy progress is not as expected; domestic epidemics are recurring.
