Last week, the Federal Reserve cut interest rates by 50 basis points (bps), while China's LPR (Loan Prime Rate) remained unchanged.
Treasury short-end rates rose, while long-end rates were essentially flat, with long-term bonds entering a period of stalemate and the yield curve flattening.
As of the close on September 23, the 10-year government bond yield was reported at 2.0345%, and the 30-year government bond yield was reported at 2.1375%.
After the mid-August turbulence, bond yields are still generally trending downward amidst fluctuations.
Currently, the market focus has shifted to how to achieve this year's growth targets and potential additional stimulus policies.
Traders are also closely monitoring the mid-September MLF (Medium-term Lending Facility) rollover volume and MLF interest rates.
The tax period in September can also easily lead to a tightening of funds, pushing up short-end rates.
However, many investment research personnel from wealth management institutions such as funds believe that investors have little disagreement on the fundamentals, and the bond market direction (yield) is still downward.
But currently, long-term bond rates have fallen to historically low levels, and the short-term uncertainty lies in regulatory intervention in the market and the fragility of trading itself (with high concentration of positions).
Overall, the demand for long-term bonds from insurance funds and wealth management funds remains high.
Focusing on the MLF rate to maintain a reasonable and sufficient liquidity in the banking system at the end of the quarter, on September 23, the People's Bank of China conducted 160.1 billion yuan in 7-day reverse repo operations and 74.5 billion yuan in 14-day reverse repo operations through a fixed-rate, quantity bidding method, with operation rates of 1.70% and 1.85%, respectively.
Among them, the 14-day reverse repo operation rate in the open market is 10 bps higher than the 7-day reverse repo operation rate in the open market.
On September 19, the Federal Reserve lowered the federal funds rate range to 4.75% to 5%, the first rate cut in four years, and the magnitude exceeded expectations by 50 bps.
Looking at the "dot plot" that predicts the future interest rate path, there are still two rate cuts of 25 bps each this year, and there may still be a 100 bps rate cut next year.
Following suit, the Bank of Indonesia announced a rate cut, and institutions expect other developed market central banks and central banks in Asian countries to follow suit.
However, China's LPR rate was not lowered last week, so the market turned its attention to this week's MLF rate.
Since the Federal Reserve's rate cut last week, domestic long-term bond yields have still edged downward slightly.
On September 25, the People's Bank of China will conduct a 591 billion yuan MLF rollover.
Minsheng Securities Tao Chuan's team analysis pointed out that overseas rate cuts are a "necessary but not sufficient" condition for domestic monetary easing, and history shows that the pace of domestic monetary easing may be slightly later than overseas.
It is expected that the next domestic reserve requirement ratio cuts and reverse repo/MLF rate cuts may take the lead, followed by adjustments to existing housing loan interest rates, and the annual LPR cuts and adjustments to existing housing loan interest rates may "not overlap".
After the sharp fluctuations at the beginning of August, the 30-year long-term bond ETF stabilized and rebounded again, breaking through the 120 mark at the close on September 23, and the bond market sentiment also reflected that the economy still needs to recover.
Data shows that from January to August, the cumulative growth rate of public finance revenue was -2.6%, and corporate income tax, personal income tax, and land value-added tax are still negative growth; the high-frequency economic indicators in September did not significantly improve, as of September 21, the decline in the sales area of commercial housing in 30 cities widened to -39%, the real estate peak season is not prosperous; the Nanhua industrial product index fell by 6% month-on-month, and industrial production is still relatively weak; however, the export side has shown resilience.
Liu Tao, a senior researcher at Guangkai Chief Industry Research Institute, said that considering the actual interest rates are still relatively high, it is necessary to further lower interest rates, and the third quarter should implement targeted reserve requirement ratio cuts as soon as possible to release liquidity to the market.
In his view, the current weighted average reserve requirement ratio of small banks in China has fallen to about 5.0%, and there is relatively little room in the short term, but it does not absolutely mean that it cannot be further reduced; while the weighted average reserve requirement ratio of medium-sized banks is 6.5%, and that of large banks is 8.5%, there is still some room for reduction.
It is recommended to implement the second reserve requirement ratio cut of the year in the third quarter, focusing on targeted reserve requirement ratio cuts for state-owned large commercial banks and national joint-stock commercial banks.
Considering that the deposit ratio of the relevant banking institutions accounts for 60% of China's banking industry, if the targeted reserve requirement ratio is cut by 0.5 percentage points, it is expected to release more than 600 billion yuan of liquidity to the market.
The demand for long-term bond allocation remains high, but given the regulatory attitude towards long-term bonds, concerns about rising supply, and the concentration risk of institutional allocation, there are still concerns about whether the seasonal rise in interest rates will occur?
In this regard, CICC said that whether it is banks, insurance companies, or wealth management, it is expected that the demand for bond allocation in the second half of the year will still be relatively strong.
The next focus may need to be on the rhythm of the bond market supply and the situation of the capital side.
Looking at the supply side, from September to December, even with the potential supply formed by the central bank's bond sales, if there is no new plan for additional issuance, it is expected that the overall net increase in government bonds from September to December will be flat with the average monthly level from January to August this year, and the supply pressure is controllable.
Looking at the capital side, institutions expect that under the new monetary policy framework, coupled with the increased demand for counter-cyclical adjustments and the appreciation of the RMB exchange rate, the capital side will be mainly stable.
Wang Qiangsong, the person in charge of the research department of Nanjing Wealth Management, told reporters that bond yields are still expected to fall, and it is expected that interest rates will linger at low levels, fluctuating slightly with market sentiment.
In terms of investment response, first, pay attention to the trading opportunities of the 3-year "two forever" banks, which still have about 10 bps of space from the previous low, and can participate in the right opportunity; in addition, the 1-year certificate of deposit is around 1.95%, and it still highlights the cost-effectiveness in short-term assets, and if the end of the quarter causes funds to converge and adjust, it is a better time for allocation.
Institutional personnel also told reporters that at present, the demand for long-term bond allocation from wealth management and insurance funds is still strong.
Although the bond market fluctuations in August led to a slowdown in the growth of wealth management scale, the growth trend is not reduced.
According to the estimation of Puyi Data, the wealth management stock scale at the end of August was about 30 trillion yuan, an increase of about 110 billion yuan compared to the end of July.
In terms of rhythm, the growth in early August was about 200 billion yuan, and the increase in the following two weeks was between 20 billion and 30 billion yuan, and the scale contracted by about 150 billion yuan in the last week due to the end of the month and market adjustments.
CICC mentioned that since this year, the demand for bond investment allocation from wealth management has significantly increased compared to the past.
Due to the prominent supply and demand contradiction this year, extending the duration and sinking credit have become strategies that wealth management has to adopt, leading to a continuous compression of term spreads and credit spreads since the beginning of the year.
Looking at the allocation varieties, this year, in order to extend the duration, there have been many new changes in the investment varieties of wealth management - a large increase in the allocation of government bonds and local bonds, and the allocation of 10-year medium-term bills and "two forever" is also very active.
For wealth management products with unstable liabilities, when encountering market adjustments, extending the duration is prone to negative feedback risks, such as the mid-August market trend is the interpretation of this logic.
However, compared with the negative feedback in the past, the overall adjustment time of this round is relatively short, and the callback range is not high.
This may be related to the fact that after experiencing the negative feedback in 2022, wealth management has strengthened liquidity prevention measures, such as increasing the issuance of cash management products and closed-end products, and reducing the volatility of fixed-open products.
"Some customers who bought wealth management in August may have suffered a slight loss, but the range is much smaller than the bond market shock in the fourth quarter of 2022, and overall, wealth management products have achieved considerable returns since the beginning of the year."
A bond investment manager of a wealth management subsidiary told reporters.
In addition, another major allocation force, insurance funds, still has a strong allocation demand.
Major research institutions believe that since this year, the growth of insurance company premium income has been relatively fast, and the amount of term deposits due by insurance companies is still at a historical high, coupled with the supply of non-standard assets still tending to contract, which further increases the pressure on asset allocation.
Against this backdrop, in the first half of this year, insurance companies further tilted towards bonds on the asset side.
At the same time, under the environment where the cost reduction on the liability side of insurance companies is slower than the income on the asset side, the "interest rate loss risk" is gradually increasing, and in this regard, insurance companies mainly respond by extending the duration on the asset side.
CICC believes that insurance companies still have the motivation to increase the allocation of bonds, especially long-term bonds, and the year-on-year growth rate of bond investments is expected to continue to maintain a high level.
In addition, the high dividend assets of the banking sector and other plates have recently shown a trend of fluctuating and falling.
If there is no obvious reversal in the follow-up, insurance companies may need to rely more on bond capital gains to support their comprehensive income performance.
