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Last week, bond selling by major banks put pressure on the market, import and export and inflation data showed divergent performance, and bond yields rose.On Monday, overseas stock markets fell sharply, the bond market was bullish in the morning, and interest rates fell rapidly. In the afternoon, the strength of bond selling by major banks began to increase, long-term bond yields adjusted sharply, and the bond market closed down. On Tuesday, the overnight US July ISM non-manufacturing PMI exceeded expectations + the overnight Nikkei futures rose and triggered circuit breakers, and the yields rose in the morning. Subsequently, the stock index opened high and then fell back, and the bond yields turned downward. On Wednesday, OMO had zero issuance in the morning, and the yields rose rapidly. The subsequent July export data was lower than the Wind consensus expectations, and the yields turned downward. On Thursday, the Financial Market Association investigated and punished some small and medium-sized financial institutions for illegal treasury bond transactions such as lending accounts and profit transfer. The bond yields rose again, and a large number of selling orders appeared in the late trading. On Friday, the market continued to be affected by regulatory news. The July inflation data was better than the Wind consensus expectations, and the bond yields continued to rise. For the whole week, 10-year treasury bonds rose 8bp to 2.20% from the previous week, 10-year government bonds rose 6bp to 2.26% from the previous week, and 30-year treasury bonds fell 4bp to 2.38%, with the volatility of the bond market increasing significantly. The 10-1 year treasury bond term spread rose from the previous week, and the AA+ credit spread narrowed overall.

Last week, the bond market was volatile. We also reminded in last week's weekly report that the central bank's attitude is obviously a key factor. The market is now beginning to re-evaluate the central bank's determination and strength in regulating long-term bonds. The monetary policy implementation report released on Friday also repeatedly pointed out the risks in the current financial market. So how do we understand the current bond market from the perspective of the central bank? What risks does the excessively low long-term bond interest rate contain? How much room will there be for this round of adjustment? Let's briefly discuss this.

The financial system has obvious pro-cyclical characteristics, which is also an important mechanism of systemic financial risks in history.A dynamic feedback mechanism will be formed between the financial system and the real economy. This mechanism will amplify the cyclical fluctuations of the economy during both economic booms and depressions, thereby increasing the instability of the financial system. The field of economics has long been concerned about financial cycles. For example, the "debt-deflation theory" (Fisher, 1933) during the Great Depression believed that excessive debt of economic entities would interact with deflation to form a positive feedback loop mechanism. Bernanke's financial accelerator theory proposes that when a company suffers a positive or negative economic shock, its cash flow and net worth will increase or decrease accordingly, and the role of the credit market will further amplify the shock effect.