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Date
2024-08-13
50-Year Bond Yield Dips Below 2.5% Amid Asset Scarcity
As the 50-year government bond yield breaks below 2.5%, the bond market has decoupled from the "anchor" of medium-term policy interest rates across all maturities.
On June 27th, the active 50-year government bond "24 Special Government Bond 03" closed at a yield of 2.48%, down by 1 basis point (BP) from the previous day, breaking through the 2.5% interest rate floor. The yields of various medium to long-term bond varieties also fell in tandem, with the active 30-year government bond "21 Interest-Bearing Government Bond 03" closing at a yield of 2.49%.
Industry insiders believe that the 50-year government bond yield breaking below 2.5% signifies that the "asset scarcity" narrative continues to unfold. With institutions scrambling to accumulate long-end interest rate bonds, the "bond bull" market may continue for a while longer, and it is important to be vigilant about the hidden risks behind this trend.
Continuous Trading Tug-of-War
Despite repeated "warnings" from the central bank about the risks of long-term bonds, the yield of the active 50-year government bond "24 Special Government Bond 03" still fell below 2.5%, setting a new low.
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On the 27th, the "24 Special Government Bond 03" closed at a yield of 2.4800%, down by 1 BP from the previous day. The yield of the active 30-year government bond "21 Interest-Bearing Government Bond 03" closed at 2.49%; for the 10-year variety, "24 Interest-Bearing Government Bond 04" fell by 1.9 BPs to 2.236%, and "24 National Development 05" fell by 1.85 BPs to 2.315%. Additionally, the yields of the 3-year and 5-year varieties fell by 2 to 3 BPs, both reaching new lows since the end of May 2020.
Market analysts told reporters that the significant psychological market position of the 50-year special government bond yield breaking below 2.5% implies that the demand for bond allocation by institutions remains strong under "asset scarcity."
The strong demand for bond allocation is backed by the "nowhere to place" high-growth funds. After the central bank banned "manual interest supplementation," the attractiveness of deposits, which had been falling in interest rates, significantly decreased, causing funds to continuously flow out to broad funds. A head of asset-liability management at a state-owned bank stated that this "asset scarcity," coupled with the ban on "manual interest supplementation," has intensified, with wealth management and fund non-bank institutions taking on a large amount of bank deposits that have overflowed, exacerbating the allocation pressure. With high-yield assets hard to find, this drives these broad funds to flood into ultra-long bonds.
"Funds, wealth management, and other entities do not hold a high absolute scale of long-term bonds, but as the most active entities in high-frequency trading on the secondary market, they have a significant impact on yield fluctuations," the aforementioned person said.
Ming Ming, Chief Economist at CITIC Securities, analyzed that since ultra-long bonds are usually managed as a trading target for capital gains in the market in addition to the coupon bottom position, non-bank entities have a very high trading activity in ultra-long bonds on the secondary market. Continuously buying in large volumes or taking profits and selling, often leads to significant short-term increases or decreases in yields.The "Asset Drought" Remains the Main Cause
Although market views differ on how long the "bond bull" market will last, there is a consensus that the "bond bull" will continue to unfold in the foreseeable future. Overall, factors such as the diminishing effectiveness of the central bank's "shout-out," the imbalance in the bond market supply and demand, and the ongoing expectations for interest rate cuts and reserve requirement ratio (RRR) reductions are the main driving forces.
The unabated enthusiasm for ultra-long bond trading is due to the ongoing fermentation of expectations for interest rate cuts and RRR reductions among non-bank institutions. Some market participants believe that interest rate cuts and RRR reductions are the main driving forces behind the bond market trend. However, despite the market's continued anticipation for the implementation of interest rate cuts and RRR reductions, there is no sign of the central bank taking action to adjust. Central Bank Governor Pan Gongsheng recently stated that monetary policy will "neither significantly expand nor contract," leading the market to expect that the window for interest rate cuts and RRR reductions may be postponed.
Many interviewees believe that there is still a possibility of interest rate cuts and RRR reductions within the year. Wen Bin believes that the window for interest rate cuts is expected to open in the third quarter. He analyzed that against the backdrop of insufficient real financing demand and relatively high actual interest rates, reducing nominal interest rates remains an important policy option. At some point in the future, adjusting policy interest rates will become a "must-have" option.
"Once interest rate cuts and RRR reductions are implemented, it means that products with current yields of 2% to 3% will also gradually decrease," a trading person told the reporter. The market still has high expectations for interest rate cuts and RRR reductions. Before the formal reduction of policy interest rates, allocating long-term bond varieties with a 2.5% yield can still bring profit space for institutions.
The market's liquidity remains balanced and relatively abundant, providing "ammunition" for institutions to allocate long-term bonds, becoming another important factor supporting the "bond bull." Recently, even though the central bank's open market operations unexpectedly turned to net withdrawal on the 26th (Wednesday), and bank liquidity slightly converged, from this week's perspective, a net injection of 301.2 billion yuan was achieved, and this month also maintained a net injection of 31 billion yuan. The interbank 7-day repurchase rate and the overnight repurchase rate both declined, with the interbank pledged repurchase rate DR001 falling by 9.38 basis points to 1.8764%, and DR007 falling by 1.16 basis points to 2.1217%.
For the foreseeable future, the market expects that under the expectation of weak real demand, the recovery of credit allocation efforts will be limited, and liquidity will remain in a loose state.
The imbalance in the bond market supply and demand will continue for a relatively long period, also becoming an important reason supporting the "bond bull" trend.
On the one hand, the scale of funds and wealth management products that undertake deposit funds continues to set new highs. Data released by the China Securities Investment Fund Industry Association shows that after the scale broke through the 30 trillion yuan mark for the first time at the end of April, the net asset value of public funds further increased to 31.24 trillion yuan by the end of May. After the scale of bank wealth management climbed sharply in April, under the market's unanimous expectation, it is expected to reach 30 trillion yuan within the year.
In the view of industry insiders, the demand for institutions to allocate long-term bonds in the second half of the year remains very strong. Tan Yiming pointed out that in the second half of the year, as the impact of the "manual interest supplement" rectification gradually fades, the demand for bond investment by banks will continue to increase. At the same time, insurance companies have a demand for long-term high-yield assets and have continued to increase their allocation of ultra-long-term national bonds this year, which will also maintain the allocation of bonds in the second half of the year. In addition, considering that wealth management usually rushes to increase volume in the second half of the year, its scale growth still has support and will continue to drive wealth management to allocate bonds.On the other hand, under strong demand, the supply of bonds, whether special-purpose bonds or special treasury bonds, has not kept pace with market expectations. According to statistics from CICC Fixed Income, as of last weekend (23rd), the cumulative issuance scale of new local bonds in the second quarter was 1.6 trillion yuan, with an issuance progress of only 35% of the annual quota. Among them, the cumulative issuance of new special-purpose bonds was 1.3 trillion yuan, slower than the same period of last year and the year before. In addition, a total of four special treasury bonds were issued, with a total amount of only 160 billion yuan, still unable to meet the strong demand of investors, further intensifying the "asset famine".
Be vigilant against hidden risks behind
Although most industry insiders believe that long-term bond yields will not remain low for a long time, under the background of "asset famine", many institutional people told reporters that the "bond bull" market may continue for some time, and it is necessary to be vigilant against the hidden risks behind the "bond bull".
Since April this year, the central bank has repeatedly "called" the market, warning of the risks of long-term interest rate bonds. After two "calls" in April, the yield of 10-year and 30-year government bonds rose by 4BP on the same day. In May, although the central bank called many times, the impact on long-term bond yields was not obvious. The latest one occurred on June 19th, when Pan Gongsheng specifically pointed out the need to pay attention to the term mismatch and interest rate risks of a large number of non-bank entities holding medium and long-term bonds, and to maintain a normal upward sloping yield curve. However, on the same day, after the yield of 30-year government bonds broke below 2.50%, it continued to decline.
Under the trend of "asset famine", the impact of the central bank's "call" on market expectation management has gradually weakened. "The yield of 50-year government bonds broke below 2.5%, which occurred under the premise of the central bank's reminder of the interest rate risk of ultra-long-term bonds. Without these expectation managements, the yield decline may be faster." Market people said to reporters.
"The price of any asset rises and falls, and it cannot keep rising." Zhang Xu, the chief fixed income analyst of Everbright Securities, believes that every time there is a "bond bull" market, everyone will focus on the positive factors and ignore the potential bearish factors. However, once the bond market adjusts, institutions will panic in groups, and the focus will quickly shift to the bearish factors.
Mingming believes that whether the bullish sentiment of the trading plate can continue may become the key to judging the trend of yield. In the short term, it is not ruled out that the long-term yield may reach the previous low, but considering that the probability of interest rate cuts has narrowed after the central bank's "6ยท19" statement, and the supervision still pays attention to non-bank long-term trading, the probability of further decline and breaking a new low is limited.
In the long run, Mingming pointed out that under the pattern where the allocation plate provides a buffer effect and the macro logic has not changed, even if the yield adjusts immediately, the upward range may also be difficult to break the previous high, and the wave corridor of long-term bond yields may further converge.