On April 11, the interest rate spread of the 10-year treasury bonds between China and the United States inverted for the first time since 2010. In early trading, the U.S. 10-year Treasury bond yield rose 5.5bp to 2.764%, which was higher than the yield of China's 10-year Treasury bond active bond 220003, which was unchanged from the previous day's ChinaBond valuation at 2.7525%. As of 18:00, the U.S. 10-year Treasury bond yield fell back to around 2.75%.
“I didn’t expect (the inversion) to come so quickly.” Both interviewed analysts lamented. Not long ago, the interest rates on 3-year treasury bonds in China and the United States inverted, and the interest rates on domestic treasury bonds of different maturities in the United States also inverted.
term interest rate inversion does it point to a US economic recession? What is the reason for the inversion in the yield spread between China and the United States? Will it put pressure on the economies and capital markets of emerging markets? What impact will it have on my country's capital market? Will it constrain my country's monetary policy?
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What is the main reason for the inverted spread?
The Federal Reserve raises interest rates shrinks its balance sheet, and the economic and policy cycles of China and the United States are misaligned
1.5%, 2%, 2.7%... Since the beginning of this year, the U.S. 10-year Treasury bond interest rate has continued to rise, and on April 11, it coincided with the The 10-year Treasury bond yield inverted. What's the main reason?
Liao Zhiming, chief analyst of the banking industry at China Merchants Securities, told reporters that from a global perspective, most economies are currently raising interest rates. Although the Federal Reserve has only raised interest rates once (25 basis points) in March, the market expects that the Fed will continue to raise interest rates in the future. The bond market has reflected this expectation in advance, so yields have risen ahead of schedule. During the same period, my country's interest rate levels did not change much, resulting in an interest rate inversion. There are many reasons why my country's interest rates remain stable, including the fact that my country's economic cycle is out of sync with overseas and , and the domestic economy is facing downward pressure.
Judging from the data, in the past year or so, the U.S. 2-year, 3-year, 5-year, and 7-year bond yields have also risen by more than 200 basis points, from less than 1% to more than 2% , even close to 3%.
The Federal Reserve has started to raise interest rates, while my country still maintains a prudent monetary policy. What is the reason for the misalignment between the two? BOC Securities Global Chief Economist Guan Tao said that the United States is experiencing high inflation that has only occurred once in 40 years, while China's current inflation level is moderate, which is an important background for the re-dislocation of Sino-US monetary policies. In view of the fact that the focus of U.S. monetary policy is on "anti-inflation", China's monetary policy is focusing on "stabilizing growth". This is the main reason for the further narrowing of the spread between the Treasury bond yields between China and the United States.
Does the inversion of term interest rates point to a U.S. economic recession?
The more serious the inversion is, the higher the possibility of recession
Over the past 50 years, the U.S. bond yield curve has become one of the important reference standards for the market to predict whether the U.S. economy will experience a recession. "There are two empirical rules that have been respected by the market. One is that raising interest rates before shrinking the balance sheet will lead to a flattening of the yield curve, and the other is that an inversion of the term spread may point to an economic recession." Senior Analyst at Huachuang Securities Liang Weichao said.
Kansas City Fed research clearly illustrates the above two items. Regarding the inversion of the yield curve, the study said that banks, especially small banks that provide long-term funds for small businesses and individuals, have inverted interest rate spreads. Since the profit model of these financial intermediaries is to borrow short and lend long, the interest spread inversion means that As the financing provided by financial intermediaries shrinks, this may bring recession risks.
"Realistically, the Fed's more aggressive tightening policy risks triggering a short-term recession. First, the United States is currently at the peak of the inventory cycle, and the new orders index is also relatively high. Too aggressive tightening may cause a rapid deterioration in short-term demand. The high level of inventories may trigger the risk of short-term recession; secondly, expectations of tightening policy by the Federal Reserve have caused a significant increase in U.S. mortgage interest rates. In the overheated real estate market, a sharp rise in mortgage interest rates may significantly suppress financing demand, triggering a Demand is declining rapidly." Liang Weichao analyzed.
However, Liao Zhiming believes that the current degree of inversion between the U.S. 10-year Treasury bond yields and the 3-year, 5-year, and 7-year Treasury bond yields is not large, and interest rates will also change dynamically, so it does not necessarily mean that an inversion of term interest rates will occur. Economic recession is only a possibility, and the more severe the inversion, the higher the possibility. What impact does
have on my country’s capital market?
There is an emotional impact in the short term, but the medium-term impact is controllable
There were five rounds of inversions in interest rates between my country and the United States before 2011. From a logical point of view, an inversion in interest rates between China and the United States is unfavorable to our country and may trigger cross-border capital outflows, thereby impacting stocks and bonds. , foreign exchange and other markets. However, many institutions said that today is different from the past, and this round of inversion in the interest rate gap between China and the United States may be a short- to medium-term phenomenon and is not sustainable.
Oriental Jincheng Research and Development Department's report stated that in the next 1-2 months, in terms of U.S. debt, the market may still have a certain degree of "inertia" in digesting expectations of the Federal Reserve raising interest rates and shrinking its balance sheet, superimposed on the U.S. CPI data in March and April. It is likely to remain high, and inflation expectations are likely to continue to push up long-term U.S. bond interest rates; as for ChinaBond, considering the recent sharp rebound in the domestic epidemic and the still downward trend of real estate, the domestic economy in the short term, especially The second quarter will still face greater downward pressure, and the advancement of credit easing still needs to be "protected" by monetary easing. The central bank is more likely to further cut reserve requirements and interest rates, and there is still some room for downside in ChinaBond interest rates.
"But looking further ahead, in terms of U.S. debt, as interest rate hikes and balance sheet reduction are implemented and downward pressure on the economy emerges, the 10-year U.S. bond interest rate may begin to enter a downward cycle at the end of the second quarter. By then, if the domestic epidemic situation improves, With policies to stabilize growth and expectations for a better economy, the 10-year China Bond interest rate still has room to rise," the team said.
Regarding the pressure on capital outflows, Liao Zhiming believes that risks and pressures exist. However, considering the large size of our country’s economy, the scale of overseas capital allocation in our country’s bonds is close to 3 trillion yuan, and our country’s capital is not completely free. There is no need to be overly pessimistic, so the pressure may be much smaller than in other countries. The impact of
on A-share , Guohai Securities strategy Hu Guopeng’s team believes that the current A-share market is in a bottoming period, and the inversion of Sino-US interest rate differentials does not mean that the market will face a sharp correction again.
China Merchants Bank Capital Market Research Institute also stated that the inversion of Sino-US interest rate differentials has a short-term emotional impact on the capital market, but the medium-term impact is controllable. Compared with the inversion of the interest rate differential between China and the United States, the surge in real interest rates on U.S. debt has a greater impact on A-shares. With the continuous inflow of foreign capital since 2016, A-shares have become increasingly sensitive to the external environment. When the real interest rate on U.S. debt soars, A shares tend to fall, and the correlation coefficient between the two is as high as -0.85, which especially has a greater impact on growth stocks.
Regarding the RMB exchange rate, CITIC Securities chief FICC analyst Ming Ming said that historically, the narrowing of Sino-US interest rate spreads is often accompanied by the depreciation of the RMB, but it is not the key factor that dominates the RMB exchange rate. Analysis of the influencing factors of the RMB exchange rate should focus on Let’s start from the perspective of international balance of payments. At the current point, the current account and direct investment account surpluses are still large, domestic US dollar liquidity is sufficient, and the scale of capital outflows is still controllable. Therefore, the impact of the narrowing interest rate differential between China and the United States on the RMB may be relatively limited. Will
restrict my country's monetary policy?
The space for interest rate cuts will be subject to certain constraints, and the room for RRR cuts is relatively larger.
Will this round of inverted interest rate differentials between China and the United States constrain my country's monetary policy?
Chen Guo, Chief Strategy Officer of CITIC Construction Investment, said that my country's prudent monetary policy still remains "centered on me". Even if price-based tools face certain constraints, quantitative tools and other precise structural tools can be fully utilized. In order to ensure the smooth realization of the 5.5% target for the whole year, monetary policy needs to continue to exert full force, precise force, and forward force to provide a loose monetary environment for the introduction of other policies.
Liao Zhiming believes that my country's monetary policy "centers on me", but this does not mean that there is no external influence. Small countries may depend more on the policies of the Federal Reserve, while my country will have more factors to consider itself. The room for domestic interest rate cuts may be significantly restricted, and the room for RRR cuts is larger than for interest rate cuts.
Beijing News Shell Finance Reporter Cheng Weimiao Editor Chen Li Proofreader Liu Baoqing
