On June 17th, the interest rate of the Medium-term Lending Facility (MLF) remained unchanged, in line with market expectations. The bond market was relatively calm that day, with short-term bond yields slightly rising, but the yields on 7-year, 10-year, and 30-year government bonds generally fell. Since April, the "bond bull" market has experienced twists and turns, but the market sentiment has recently recovered, with the yield on the active 30-year government bond (230023) closing at 2.5085% on the 17th, down by 0.35 basis points. It is worth mentioning that on February 28th of this year, the yield on the 30-year government bond first broke below 2.5%, lower than the MLF rate, which once attracted market attention, and later touched 2.4%. Earlier, regulatory authorities repeatedly issued documents and warnings against market speculation, with yields rising to around 2.58%, but recently they have started to approach 2.5% again.
Institutional sources generally told reporters that due to the recent loose liquidity and the bond market still being in an optimistic mood of "asset scarcity," most interest rates have fallen. Although the probability of a rate cut at the end of the quarter is low, the bond market correction is still an opportunity for layout.
External factors may constrain China's interest rate cuts.
Recently, there have been views that the People's Bank of China will lower the MLF rate, especially as the overall credit data for June is soft.
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However, Zhou Hao, Chief Economist at Guotai Junan International, told reporters that he disagrees with the view of a rate cut. "On one hand, the central bank needs to find a balance between the policy rate and the exchange rate. Due to the large interest rate gap between China and the U.S., the renminbi still faces depreciation pressure, so the central bank may think twice when lowering the policy rate, especially as the Federal Reserve has postponed the first rate cut to the second half of 2024 (the consensus expectation is now after September). At the same time, the central bank does not want long-term bond yields to plummet, continuously warning against speculative activities in the bond market. Therefore, an unexpected rate cut may lead to more capital inflows into the bond market, which may not be consistent with the central bank's recent statements."
Nevertheless, Zhou Hao believes that there is a possibility of a reduction in the Loan Prime Rate (LPR) on the 20th of this month, especially the 5-year LPR, which will help banks retain mortgage loans for households.
Looking at the data, the total new social financing in May was 2.06 trillion yuan, mainly from government bond financing. From the total financing of residents, enterprises, and the government from January to May 2024, it is known that the cumulative financing of resident credit is less than 900 billion yuan, about 100 billion yuan less than last year; while the net financing of government bonds is about 35 billion yuan less than the same period last year; corporate credit and bond financing are 100 billion yuan less than the same period last year, and the reduction in corporate financing is affected by "water squeezing," leading to a lack of demand rebound.
Some views believe that the current China-U.S. interest rate spread has inverted to 220 basis points, and it is not easy for the renminbi to the U.S. dollar exchange rate to continue to maintain around 7.2. The current renminbi midpoint is still nearly 1000 points higher than the model, which shows the central bank's intention to stabilize the exchange rate. Under this background, interest rate adjustments also need to consider the impact on the exchange rate.
Tommy Wu, an emerging market economist at Commerzbank, told reporters that in the past two weeks, the People's Bank of China has set the daily midpoint of the renminbi at around 7.11. Since the midpoint was below 7.0950 at the beginning of April, there has been a slight depreciation tendency recently, but the central bank still maintains exchange rate stability by setting a stronger midpoint. He also said that recently, Chinese exporters have postponed the exchange of U.S. dollars, and the recovery of outbound tourism has led to more foreign exchange outflows.
Nevertheless, some changes in recent U.S. data have slightly relieved emerging markets. The U.S. CPI in May fell from 3.4% to 3.3% (a month-on-month increase of only 0), and the core CPI fell from 3.6% to 3.4%, both lower than expected, and the super core CPI monthly rate recorded a negative growth for the first time in two years.The unexpected decline in inflation has sent the market into a frenzy of delight, with the probability of a rate cut in September rising to 56% on June 13th. Although the Federal Reserve itself forecasts only one rate cut within the year, the current interest rate market is now pricing in two cuts, a significant climb from the previous 25 basis point (BP) cut expectation.
Should the Federal Reserve begin to cut rates in the future, the overall pressure faced by China is also expected to ease. The head of Asian economic research and chief China economist at UBS, Wang Tao, told reporters that she anticipates the People's Bank of China (PBOC) may lower the reserve requirement ratio again and use other tools to ensure ample liquidity. However, she does not expect the Medium-term Lending Facility (MLF) rate to be reduced within the year. Nevertheless, as bank deposit rates continue to decline further, the Loan Prime Rate (LPR) may be reduced by 10 to 20 basis points.
Long-term bond yields have fallen once again. As of the close on June 17th, Beijing time, the yield on the active 10-year government bond (240004) was reported at 2.289%, down by 0.6 basis points, having touched a high of 2.35% in April; the yield on the active 30-year government bond was reported at 2.5075%, down by 0.35 basis points, having touched a high of 2.58% in April.
It is not difficult to observe that long-term bond yields have declined to some extent from their peaks in the previous two months. First Financial Daily previously reported that this year, the PBOC or through media channels, has frequently expressed its stance on long-term interest rates, leading to a reversal in the continuous downward trend of long-term bonds, primarily represented by the 30-year government bond yield, and a rapid cooling of speculative trading sentiment in the market. The 30-year government bond ETF once surged above 115 in March, then continuously declined, and for a long period fluctuated around the 111-112 range, with trading activity significantly contracting.
This year, the 10-year government bond rate once fell to 2.2%, and the 30-year government bond rate once fell below 2.5%, triggering regulatory concern over long-term bond market rates and financial institution interest rate risks. For instance, the stance on the long end of the bond market shifted from "a reasonable range of 2.5% to 3% for long-term government bonds" to "a reasonable operating range of 2.5% to 3.0% for 10-year government bonds"; the stance on economic growth shifted from "reasonable economic growth" and "a fundamentally positive long-term outlook" to "a potential growth rate of 5%"; and the expression regarding government bond trading shifted from "possibly including the buying and selling of government bonds in the policy tool reserve to enrich the liquidity management toolkit" to "selling government bonds when necessary."
In this context, traders previously began to shift towards short- and medium-term bonds, causing the yield curve to steepen. However, recently, long-term bond yields have started to decline.
The recent changes in the bond market are mainly due to the need for economic data to stabilize, especially since the inflation and social financing data for May did not exceed expectations, and demand lacks short-term upward elasticity.
Wang Qiangsong, the head of the research department at Nanjing Bank Wealth Management, told reporters that the May inflation data basically met expectations, with the CPI increasing by 0.3% year-on-year, in line with the previous figure. The rise in pork prices was one of the few bright spots on the consumer side, while alcohol, rent, and transportation tools all saw a monthly decline in prices, indicating weak consumer momentum. The PPI increased by -1.4% year-on-year in May, higher than the previous -2.5%, mainly driven by price increases in the black, non-ferrous, and electrical machinery industries. There are signs of price increases for some products and resource products with supply restrictions and external demand; however, the pricing power in the processing manufacturing industry and downstream demand industries is relatively weak. The rise in inflation in the second quarter is an important macro clue.
In the future, the recovery of the real estate market is also crucial. He mentioned that in terms of high-frequency real estate data, in the first half of June, the sales of commercial housing in 30 cities decreased by 42% year-on-year, with no improvement in new housing sales; however, in terms of second-hand housing prices, there are signs of monthly price improvement in places like Hangzhou, Beijing, Chongqing, Wuhan, Suzhou, and Chengdu in June, and there are also signs of local improvement in the transaction area of second-hand housing.Wu Zhaoyin, Director of Macro Strategy at AVIC Trust, told reporters that the central bank has made clear or implied statements on special government bonds on multiple occasions. Although the issuance of ultra-long-term special government bonds has had some impact on the bond market, the market still maintains a bullish atmosphere and has not obviously shifted to a bearish trend.
On the one hand, monetary policy remains loose. Up to now, there is still no sign of the central bank raising policy interest rates or increasing the reserve requirement ratio. On the other hand, the bond market has ample liquidity. Even when the scale of open market operations is significantly reduced to 5 billion yuan or 2 billion yuan, the bond market can still maintain good liquidity of funds. After the issuance of special government bonds, the supply of assets increases, and the relatively abundant capital should be sufficient to digest the additional supply of assets. Looking forward, unless there is a clear economic recovery or a shift in monetary policy, the bond market may continue to consolidate at the bottom.
"The yield on government bonds has a ceiling and a floor. The yield has already reflected monetary policy and the economic fundamentals, and the bond market is in a state of stalemate under the interweaving of bulls and bears. Entering March, the downward trend of bond yields has come to a pause, and then it has entered a stage of range-bound fluctuations. At present, it seems that the reasonable range for the yield on 10-year government bonds is approximately 2.25% to 2.35%," said Wu Zhaoyin.
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