Beijing, September 10, 2024 – The Chinese bond market has seen a notable turnaround in sentiment, with institutions increasingly turning to buying. This shift has been fueled by the growing popularity of interbank certificates of deposit (CDs) amidst cautiousness towards longer-term bonds.
Market Emotion Warms, Institutions Shift to Buying
Recent weeks have witnessed a further easing of market sentiment. From September 2 to 6, key maturities of government bonds saw yields decline by 5 to 7 basis points (bps), with the 10-year government bond yield dropping by 3 bps to around 2.14%. The reduction in net supply of interest rate bonds and the rise in expectations of monetary easing have contributed to the repair of market sentiment, prompting most institutions to shift from net selling to active buying.
Interbank CDs Gain Popularity
Compared to longer-term bonds with greater regulatory uncertainty and short-term bonds with significantly lower yields, interbank CDs have emerged as a favorite. CDs offer high yields, good liquidity, and short maturities, making them highly cost-effective. Many overseas institutions have increased their holdings of CDs this year, an investment manager from a branch of a securities firm in East China told Yicai.
As of September 9, the yield on 1-year government bonds was reported at 1.44%, while the interest rate on 1-year CDs was generally around 2%. Multiple investment banks believe that the weakened ability of banks to provide funds in early September and the rising interbank lending rates may reflect the current vulnerability of the money market. With increased funding pressure expected in the latter half of the month, the necessity for a reserve requirement ratio cut has risen, making short-term, high-cost investments a preferred choice.
Easing Expectations and Market Sentiment
In the past week, weak economic data and rising policy expectations further boosted the bond market. Compared to the significant volatility in August, the bond market has seen a more stable trend in recent weeks.
As of the close on September 6, the yield on 1-year government bonds was 5.75 bps lower than the previous week at 1.43%, while the yield on 10-year government bonds fell by 3.25 bps to 2.1325%. The yield on ultra-long-term 30-year government bonds dropped by 5.75 bps to 2.3025%. On Monday (September 9), yields on all these maturities further declined by 1 to 2.5 bps.
Data released on September 9 showed that the year-on-year growth rate of August CPI was 0.6%, up by 0.1 percentage points from the previous month, driven by rising food prices. Core CPI grew by 0.3% year-on-year, down for two consecutive months, significantly affected by the base effect. The PPI continued to weaken, down by 1.8% year-on-year, down by 1 percentage point from the previous month.
In terms of policy, People’s Bank of China Monetary Policy Department Director Zou Luan recently stated that the average statutory deposit reserve ratio of financial institutions is currently about 7%, leaving some room for maneuver. The central bank will reasonably control the strength and rhythm of monetary policy adjustment.
Looking Ahead
Despite the downward trend in yields for 10-year and 30-year long-term bonds in recent weeks, institutions remain cautious about these types of bonds. Several fixed-income investment managers said that the absolute yields of long-term bonds are approaching the policy bottom line, suggesting caution for 10-year and 30-year bond varieties.
Zhang Zhao, macro strategy director at China Aviation Trust, noted that since the beginning of the year, the yield on 30-year government bonds has dropped by 50 bps to 2.34%. However, after the China Securities Association announced on August 19 that some financial institutions were suspected of manipulating market prices and benefiting at the expense of others, the central bank regularly carried out secondary market transactions of government bonds, and the yield on medium-to-long-term government bonds stopped its downward trend. At the end of August, the yield on 30-year government bonds was 2.37%, up by 4 bps from the low point at the beginning of the month. Currently, the yield on long-term bonds is no longer trending downward in a single direction but has entered a period of bottoming and fluctuation.
In his view, the bond market is showing clear characteristics of bottoming out – yields have stopped their downward trend and begun to fluctuate at the bottom; overall volatility is relatively low, but there are times when volatility is relatively large; bulls and bears are fiercely competing; market sentiment is cautious, and many investors are in a wait-and-see mode, waiting for economic policies and data to provide guidance.
In the second half of last year and the first half of this year, the trading volume of bonds in the interbank market gradually increased, breaking through 2 trillion yuan multiple times. However, in the past two months, the trading volume of bond spot contracts has steadily declined, falling below 1 trillion yuan by the end of August. The continuous decline in trading volume indicates that many bond investors have exited the market, waiting for further clarification of economic data and policies to decide on the next stage of investment decisions.
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