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According to Bloomberg, the Jiangsu branch of the People's Bank of China requires rural commercial banks under its jurisdiction to pay attention to the risks of long-term bond holdings, and not to increase bond positions on a large scale during the period when large state-owned banks sell long-term bonds, so as to control their holding risks.

A reporter from Securities China inquired about this news with a trader at a rural commercial bank in Jiangsu Province, and the person confirmed that there was indeed relevant guidance.

Some rural commercial banks were asked not to purchase long-term government bonds on a large scale

"It's very quiet, not much trading," a person in charge of the trading desk of a rural commercial bank in Jiangsu Province told reporters. He was describing the rural commercial bank's trading of treasury bonds on Monday and Tuesday this week.

After the central bank's "combination punch" of interest rate cuts in July, long-term treasury bond yields fell steeply. On August 5, the interbank long-term treasury bond yields hit a new historical low. The yield to maturity of the 10-year active treasury bond "24 Interest-bearing Treasury Bond 04" fell below the key point of 2.1%, reaching a new low of 2.0825% during the session; the yield to maturity of the 30-year active treasury bond "23 Interest-bearing Treasury Bond 23" was inverted with the 1-year MLF rate (2.3%) during the session, falling to a new low of 2.2925%.

However, at the end of the trading day, the long-term treasury bond yields rose rapidly, making a "V"-shaped reversal: "24 Interest-bearing Treasury Bond 04" and "23 Interest-bearing Treasury Bond 23" both rose in opposite directions at the end of the trading day, with the former closing at 2.1425% and the latter closing at 2.34%.

There are market rumors that the reason for the market reversal on August 5 was that the central bank instructed large state-owned banks to sell government bonds.

Bloomberg quoted several traders on Monday, trying to present the reason: many state-owned banks continued to sell large amounts of treasury bonds, including 10-year active bonds, in the afternoon, with most of the sales orders being 100 million yuan each, and once they were bought by institutions, they would continue to place sales orders. One of the insiders said that in addition to 10-year treasury bonds, some large banks also sold 30-year treasury bonds.

According to the 21st Century Business Herald, the vice president of a rural commercial bank said that it was true that large banks sold government bonds at the end of the day, but it was unclear whether it was guided by the central bank.

In an interview with reporters, both traders said that the central bank is very likely to sell bonds when long-term bond yields continue to fall, such as on August 5. It is in this context that the aforementioned rural commercial banks in Jiangsu Province were asked not to buy large amounts of treasury bonds during the period when large banks sold large amounts of treasury bonds.

August 6 continued the late trading trend of August 5. As of 16:30 Beijing time, the yield of the 10-year active treasury bond 240011 rose by 0.3bp to 2.153%, the yield of the 30-year active treasury bond 230023 rose by 0.25bp to 2.3425%, and the yield of the 10-year active bond 240210 rose by 0.25bp to 2.205%. In terms of activity, the number of active 10-year treasury bonds and active bonds exceeded 2,300 and 2,480 respectively.

In short, long-term government bond yields are testing a new "reasonable range."

The long-term bond holdings of rural commercial banks have repeatedly attracted attention

According to Bloomberg, citing a person familiar with the matter, the central bank also asked market makers on Monday to report detailed long-term bond holdings, including trading volume and current positions.

The reporter has not been able to confirm this news. But in fact, since the beginning of this year, the pursuit of long-term bonds by rural commercial banks, one of the main forces in long-term bond allocation, has repeatedly attracted regulatory attention.

Long-term bond trading has been crowded this year, and institutional buying has continued to push long-term bond yields down, accumulating risks in holding positions. Rural commercial banks are an important part of the buying army. In order to prevent risks and reduce leverage, rural commercial banks in some provinces have received guidance from local regulatory authorities many times this year.

In early July this year, a rural commercial bank in a province in East China received a regulatory investigation notice, which required it to explain its bond investment business.

The relevant rural commercial banks were required to explain the reasons for the increase in bond investment balances, the main considerations and decision-making mechanisms for bond investment, especially the medium- and long-term (more than 5 years) bond investment. For example, the impact of holding for maturity or trading purposes on bond investment decisions; the impact of local governments on bank bond investment behavior; and the possible impact of changes in bank bond investment behavior on asset-liability management and local loan issuance.

According to media reports, many local corporate banks also need to explain that in the context of continued decline in bond yields, local corporate banks use shorter-term deposit funds to invest in longer-term (more than 5 years) bonds, which are subject to maturity mismatch risks (borrowing short and using long) and duration risks. What risk control measures do banks have? After the People's Bank of China warned of bond market risks on April 23 and announced the launch of treasury bond borrowing operations on July 1, changes in local corporate banks' bond investment behavior, including changes in bond holdings and trading volumes, etc.

On the public level, since April this year, the central bank has repeatedly managed expectations for long-term bond yields in its media and public statements:

From early April to late April: the central bank's comments on long-term treasury bond yields were mostly focused on "being in a reasonable range for a long time"; from late April to the end of May: the head of the central bank was interviewed by the Financial Times and mentioned the key point of 2.50% of the 30-year treasury bond yield for the first time, and then continued to emphasize it. Entering June, the core of the central bank's guidance on long-term bond expectations involved risk warnings, among which the bond types gradually evolved from 30 years to all varieties, and the risk warning subject switched from agricultural and commercial banks to funds.

Going back to March this year, some media reported that in order to prevent rural commercial banks from holding too much long-term debt and breeding interest rate risks, the central bank conducted a special survey on rural commercial banks' participation in the bond market and examined the bond investments of rural financial institutions.

Editor: Li Xuefeng

Proofread by: Tao Qian

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