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Sino-US 10-year national debt spread
Our reporter Wang Wei
Since mid-April, the US bond market has suddenly started a sharp drop mode, and the 10-year US bond yield has rushed to the 3% mark, triggering a new round of global bond market selling. At the same time, monetary easing is expected to ignite the long-term sentiment of China's bond market. The yield of China Bond's 10-year government bond fell sharply to 3.5%. The Sino-US spread quickly narrowed to below 60BP, triggering the market's decline in the US bond market. China debt concerns.
"If there is a trend reversal in the yield of US Treasury bonds, there will be pressures that cannot be ignored for the global bond market." Market participants pointed out that given the fact that the Fed still has 2-3 interest rate hikes during the year, the US bond yield will also have a high probability. On the upside, it is necessary to be wary of overseas changes that may adversely affect the domestic bond market.
Inflation heats up to break US debt by 3%
In April this year, the Chinese and American bond markets played a song "The Song of Ice and Fire": the Chinese "debt cow" sentiment warmed up, but the US dollar bond was "Xiantu".
Beginning in early April, the 10-year US Treasury yield rose quietly. From the 2.73% in the first week of the month, it rose 10BP to 2.83%. After a high level of consolidation for more than a week, the bears started the offensive again on the 18th, and the interest rate continued to rise for the next five trading days. On the 24th, it hit an important psychological barrier of 3%. It was the first time since January 2014, and it was further up to 3.03% on the 25th. It has risen by 30BP compared with the beginning of the month.
Why is the yield of US bonds rising rapidly? Market participants believe that the recent rise in crude oil prices and the expected recovery in inflation are important catalysts for the 10-year US Treasury yield to break the 3% mark.
Affected by the geopolitical situation, the recent rise in oil prices has been rapid. Since April 9, ICE oil has started a round of gains. It has continued to climb after breaking through $70/barrel in just two days. It hit a high of $74.65 on the 24th, creating 2014. The new high since the end of the year. In addition, recent prices of commodities including aluminum, copper and nickel have all risen, and the strengthening of inflation expectations has intensified the market's selling of bonds.
“Continuously rising oil prices mean that the costs of industries such as industry, food, and retail industries are rising, which has led to higher inflation expectations.†CITIC Securities 600030, the chief executive of the stock market, clearly pointed out that the latest CPI data released by the US showed a significant increase in price levels due to The economic recovery in the United States has continued for a certain period of time. The market’s concerns about the macro economy have gradually turned to the expected rise in inflation, and the subsequent fall in bond prices that the Fed’s interest rate hikes may bring, ultimately reflecting the return on US Treasury bonds. The jump in oil prices rose after a round.
The Oriental Solids Panjie team said that the recent rapid rise in US bond yields has two main reasons: First, because the US economic fundamentals are still good, the actual interest rate measured by the US 10-year inflation index (TIPS) yield, Since February, it has remained in the 0.7%-0.8% range, which is a high level since 2016. On the other hand, the rapid rise in oil prices since April has led to a significant increase in inflation expectations and interest rate hikes, as reflected by Fed Watch. The probability of raising interest rates in the June meeting on interest rates has approached 100%, and the probability of raising interest rates in September has risen from 50% to 72% since April.
The rapid rise in the yield of the US bond also opened the curtain of a wave of global bond market selling. Since April 19, German 10-year bond yields have risen rapidly from 0.52% to 0.67%, UK 10-year bond yields have risen by about 10BP to 1.59%, and Japanese 10-year bond yields have risen from 0.034% to 0.06. %.
Limited short-term impact on China's debt
While the overseas bond market experienced a sell-off, the Chinese bond market as a whole remained shrouded in bullish sentiment. In particular, after the central bank announced the RRR cut on the evening of April 17, the market’s expectation of “debt cows†rose again.
On April 18, the yield on China Bond's 10-year government bond fell sharply by 15BP to 3.5%, hitting a new low since late August 2015, and a sharp drop of 24BP from the end of March. Despite the short-term capital tightening, China Bond's 10-year government bond yields returned to 3.6%, but as US bond yields accelerated, the Sino-US spreads, which have continued to narrow since the beginning of the year, hit a new low, April. On the 20th, it fell to 56BP, which was significantly reduced by more than 40BP from the end of March. It is now close to the lowest level since the second half of 2011.
The Sino-US spread quickly narrowed to below 60 BP, which may have left the “comparable range†of the Sino-US spread mentioned by the central bank governor Yi Gang during the Boao Forum, which also triggered the market's decline to the US debt. China debt concerns.
Market participants pointed out that in theory, the change in the spread between China and the United States will affect the exchange rate expectation and the direction of capital flow. According to the theory of interest rate parity, the decrease in the spread between the two countries will lead to the depreciation of one currency, which will cause the renminbi to face depreciation pressure. The rise in interest rates will also trigger the risk of capital outflows. It should be said that the upward trend of the US bond yields through the compression of the Sino-US spreads has an objective pressure on the interest rate of Chinese government bonds.
However, most institutions believe that the narrowing of the spread between China and the United States is not the main contradiction of the current Chinese bond market. Although the continued decline of US debt may have a certain impact on market sentiment, the current market focus is still on domestic monetary policy, liquidity and regulation, and the RMB exchange rate is expected to be stable, capital outflow pressure is small, and the Sino-US spread is maintained. The necessity is declining.
Guotai Junan Securities Chief Financial Officer Han Han pointed out that the reason why China-US interest rate difference is important in 2016-2017 is because for the first time in many years, the RMB depreciation cycle + the Fed tightening cycle + China's economic growth shift period, stable and maintain a comparison High levels of Sino-US spreads are important. However, in 2018, the unilateral depreciation of the renminbi is expected to be broken, the pessimistic expectations for the Chinese economy have improved substantially, and the need to maintain the Sino-US spread has declined.
Considering that the rapid narrowing of the Sino-US spread is more disturbed by short-term factors, the RMB exchange rate and international capital flows have not changed much, and the current Sino-US spread is not the core factor affecting the domestic bond market. After the short-term emotional disturbance, it is expected The main drivers of the domestic bond market are still fundamentals and policies.
The future restricts the rate of return
The short-term impact of the decline in US debt on China's debt market does not mean that there is no restriction. Especially in the context of a significant increase in the linkage between the global economy and the financial market, analysts believe that the recent changes in overseas markets are undoubtedly a total negative domestic bond market. The Fed’s interest rate hikes and contraction process are still advancing, and the US bond interest rate hub is still likely to rise. The narrowing of the Sino-US interest rate differential will still affect China’s monetary policy. On the other hand, if the Sino-US interest rate spread continues to narrow, the RMB will be superimposed. In the future, there will be downward pressure on the exchange rate, and funds may be outflowing. As a result, the downward momentum of the domestic bond market yield will weaken.
“We believe that the Sino-US spread is one of the important factors restricting the trend of China's bond yields.†Ping An Securities raised three reasons. First, the maintenance of the spread between China and the United States is of great significance for the stability of cross-border capital flows and the RMB exchange rate; Second, from the situation before and after the recent narrowing of the spread between China and the United States, 50BP may be the lower limit of the “comfort zone†of the Sino-US spread that the central bank needs to maintain; third, with the development and opening up of China's financial market. As the degree deepens, the linkage between the Chinese bond market and the peripheral economies has significantly increased, and the synchronicity of bond yields has increased significantly.
Huachuang Securities analyzed that the impact of the rapid narrowing of the spread between China and the United States will mainly be reflected in the following four aspects: First, the depreciation of the RMB and the pressure on the outflow of foreign exchange will increase; Second, the current Sino-US spread is low, further The central bank followed the pressure of the Fed to raise interest rates several times. Third, the intensity of foreign-funded domestic interest rate bonds increased in the first quarter. At that time, the Sino-US spread was in a more comfortable space of 80BP-100BP, and the current Sino-US interest rate fell. It will reduce the enthusiasm of foreign capital entering the domestic bond market. Fourth, the US bond interest rate further blocked the downward trend of China's national debt interest rate, and the future US interest rate does not have a substantial decline. The pressure to repair the spread is more likely to pass through China. The increase in the interest rate of the national debt has eased.
Analysts have warned that the rapid downside of the previous bond yields has been more favorable. In this case, we should be more vigilant about the correction after the interest rate overshoot. If the US bond yield continues to rise rapidly, it will continue to compress the Sino-US spread. At the same time, it may still be disturbing the sentiment of the domestic bond market.
"Considering the mainstream expectations, the Fed still has 2-3 interest rate hikes during the year. The US debt is stable at 3% and continues to break upwards is a high probability event. The central bank's open market interest rate will also follow, and the domestic currency instrument interest rate will increase. Perhaps at 15-20BP, the current 3.6% 10-year bond yield margin is already very thin," said Han.
(Editor: Yue Right HN152)
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