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Since the beginning of this year, a large amount of funds have continued to flow into the bond market, driving the bond bull market. However, as long-term government bond interest rates continue to hit record lows, the market has begun to worry about the risks behind the bond bull market.

In recent times, the central bank has repeatedly warned the market of risks. At the same time, the "little essay" of the bond market has also spread widely. The market sentiment is relatively sensitive due to the interweaving of under-allocation sentiment and concerns about increased regulation. The long-short game in the bond market is still ongoing, and there are many speculations and questions in the market.

Will the central bank prohibit some small and medium-sized banks from trading in government bonds? What is the central bank's consensus range for long-term interest rates? How did the four rural commercial banks reported transfer profits through lending accounts? How is the central bank's stress test on the risk exposure of financial institutions holding bond assets going? Has the bond market adjusted in place? What will be the subsequent trend?

In response to the above hot issues, China Business News recently interviewed authoritative experts and insiders in the industry, and the content is summarized as follows.

1. Is it true that several banks were notified to prohibit government bond trading?

Financial regulatory authorities have not prohibited small and medium-sized financial institutions from trading in government bonds.

Yicai learned from an informed source that in the context of the game between long and short sides in the bond market, some opinions deliberately stigmatize the financial management department for administrative intervention, and the "ban on treasury bond trading by small and medium-sized financial institutions" is a misunderstanding of the market's warning of risks by the financial management department. The financial management department will definitely adhere to marketization and will not replace market players. Financial institutions have the right and freedom to make independent investment decisions.

There is a market misunderstanding that the central bank controls and determines the interest rate level of the government bond market.

In this regard, the First Financial reporter recently interviewed Xu Zhong, deputy secretary-general of the National Association of Financial Market Institutional Investors. He said that after the central bank warned of risks, some financial institutions went from one extreme to another and suspended treasury bond trading in a "one-size-fits-all" manner, which was both a reflection of their weak risk management capabilities and a misunderstanding of the central bank's intentions.

Recently, the downward trend in my country's long-term treasury bond interest rates is due to not only the imbalance of short-term supply and demand in the bond market, but also the fact that financial institutions are led by some "small essays", and some financial institutions lack the ability to manage interest rate risks.

In addition, there are some financial institutions that have made profits through illegal and irregular behaviors such as manipulating market prices. In the next step, the financial management department will further improve the monitoring and analysis system for the stable operation of the bond market, closely monitor and punish in a timely manner, and support participants to participate in transactions normally and in compliance with regulations.

2. Where is the acceptable range for long-term bond interest rates?

The central bank has not set a range for long-term government bond interest rates.

Some market opinions believe that the central bank should control and determine the interest rate level of the treasury bond market. In fact, this is also a misunderstanding.

Xu Zhong said that the central bank's risk warning for long-term treasury bond interest rates is to curb the potential systemic risks caused by the herd effect leading to a unilateral decline in long-term treasury bond interest rates, and no long-term treasury bond interest rate range has been set. This is different from some countries implementing unconventional monetary policies to control the treasury bond yield curve.

After the long-short game, the market's focus is still on the central bank's attention to the long-term interest rate. Since the beginning of this year, the unilateral decline in long-term bond interest rates is due to the imbalance between supply and demand in the bond market and the delay in the issuance of government bonds, which has led to unilateral downward expectations. With the accelerated issuance of government bonds this year, the increase in supply is likely to reverse expectations and increase interest rates, thereby triggering risks. The consensus range of long-term bond interest rates is a dynamic balance process. On the basis of market norms, after risks are cleared, prices will naturally be within the consensus range.

In addition, short-term economic indicators generally have a greater impact on treasury bond interest rates within 2 years, or at most within 5 years. The relationship between ultra-long-term treasury bond interest rates and short-term economic indicators is not that great, but is more affected by factors such as financial market investment strategies and investment sentiment, and is difficult to accurately predict.

In its second quarter monetary policy report, the central bank mentioned "strengthening guidance of market expectations and paying attention to changes in long-term bond yields during the economic recovery." This also means that long-term bond yields must be consistent with fundamentals in the long run.

3. Recently, four rural commercial banks were named for allegedly manipulating market prices and transferring profits in secondary treasury bond transactions. Are there any shady operations by small and medium-sized financial institutions?

Some investors transfer profits in small quantities and at high frequency through the Ant Moving method.

The reporter learned from an informed source that the liquidity of the treasury bond market is relatively active and the spread is very small, but from a long-term perspective, some institutions always trade with a very fixed counterparty. At the same time, asset management institutions transfer the income originally belonging to financial institutions to another account, and there is a transfer of interests between traders and some institutional shareholders, and both parties to the transaction have internal control problems.

Xu Zhong said that some small and medium-sized financial institutions lack sensitivity to interest rate risks. Some small and medium-sized banks have not fully considered the interest rate fluctuation risks of treasury bond investments. In the strong speculative atmosphere, some institutions have changed from allocation to active trading, and even speculated on bonds as stocks; the investment concentration is very high, and the bond income of some small and medium-sized financial institutions accounts for more than 50% of their operating income, which to a certain extent also reflects the imperfect corporate governance of these institutions and their weak risk control capabilities.

At the same time, some financial institutions profited by manipulating market prices and other illegal and irregular behaviors. Some small and medium-sized financial institutions illegally lent accounts to private equity funds and other institutions, went long on long-term government bonds and shorted government bond futures, manipulated prices, and transferred profits, fueling the downward trend of long-term government bond interest rates.

It is understood that from the cases of illegal transactions investigated by the NAFMII, it can be seen that the management of some small and medium-sized financial institutions are not familiar with financial market operations, have lax internal controls, and have overly flexible incentive mechanisms, which provide opportunities for practitioners to conduct illegal operations. Some traders took the opportunity to collude with private equity firms inside and outside the OTC market to transfer benefits. In addition, high-frequency hedging transactions and other strategies are common operating methods of overseas hedge funds, which have high investment risks, while domestic small and medium-sized financial institutions use the deposits of ordinary people to gamble on the direction and spread. Data show that the bond income of some small and medium-sized financial institutions accounts for more than 30% of their operating income, and some even exceed 50%. Such aggressive trading strategies obviously exceed their risk management capabilities.

In fact, since last year, the NAFMII has been concerned about some financial institutions using treasury bonds to transfer profits. Currently, the NAFMII has established a law enforcement coordination mechanism with the securities regulatory authorities and relevant public security agencies, and has transferred clues of cases involving large amounts of profit transfer involving asset management products to the public security department.

4. Has the central bank started stress testing the risk exposure of financial institutions’ bond assets? What is the progress?

China Business News learned that the central bank has begun stress testing the risk exposure of financial institutions’ bond assets. The main contents of the stress test include the proportion of financial institutions’ bond investments in their balance sheets, bond duration, and whether the capital can cover the risk.Discover FinanceThe study also analyzes the interest rate risk of institutions and provides some risk control suggestions for institutions that hold a large number of bonds in the short term and have high risk exposure.

Previously, the central bank has repeatedly warned of bond market risks in its latest monetary policy implementation report, and stated that it would conduct stress tests on the risk exposure of financial institutions' bond assets to guard against interest rate risks.

5. How much impact will expectations for future economic conditions have on the downward trend in long-term Treasury yields?

The current economic foundation determines that long-term government bond yields will not decline in the long run.

Looking back at the Japanese economy, from the 1970s to the 1980s, Japan's economy rose rapidly, and this period was the golden age of Japan's economic development. In 1995, Japan's economic development reached its peak. At that time, Japan's total economic output was 5.45 trillion US dollars, while the United States' was 7.64 trillion US dollars, and Japan's total economic output reached 70% of that of the United States; Japan's per capita GDP was about 43,400 US dollars, which was 1.5 times that of the United States (28,700 US dollars). After the 1990s, Japan experienced 30 years of low economic growth. By 2023, Japan's total economic output was equivalent to 15% of that of the United States, and its per capita GDP was 0.4 times that of the United States.

Industry experts believe that the trend changes in the above data in Japan do not exist in China, and China's inflation will not remain below 1% for a long time like Japan. China's economic development potential is huge, and there is still a lot of room for industrial division of labor compared with the United States, Japan and Europe, and there is also much room for improvement in the quality of the labor force.

Such an economic foundation means that long-term treasury bond yields will not fall in the long term. In the view of industry experts, the determinants of short-term and ultra-long-term bond yields are different. The short-term is more affected by short-term economic indicators, while the long-term is more affected by emotions and expectations.

The Third Plenary Session of the 20th CPC Central Committee clarified the direction of reform in terms of improving the fiscal relationship between the central government and local governments, expanding domestic demand with a focus on boosting consumption, and enhancing the consistency of macroeconomic policy orientation, including improving the financial strength of local governments, promoting the matching of financial power and administrative power, and giving equal weight to investment and consumption. The country also accelerated the comprehensive green transformation of economic and social development, deployed the establishment of a market-oriented and legalized mechanism for the orderly withdrawal of inefficient production capacity, and emphasized the unswerving completion of the annual economic and social development goals and tasks.

Xu Zhong believes that with the solid implementation of various policy arrangements, the foundation for economic recovery and reform and development will be further consolidated, and social expectations will be further improved.

6. Is the central bank overly concerned about the bond market?

Recently, the market has been full of small essays, and the high volatility of the treasury bond market has attracted great attention from investors. Industry experts emphasized that first of all, the central bank has a top-down supervision system for the bond market. The central bank only issued risk warnings to institutions with aggressive transactions, and not all rural financial institutions are at high risk in treasury bond transactions.

The above experts further pointed out that small and medium-sized institutions do not have enough understanding of the interest rate risks in the financial market and are easily instigated by small essays. Recently, as the volatility of the bond market has intensified, the net value of fixed-income wealth management products has also fluctuated sharply. The bond market volatility in 2022 triggered a wave of wealth management redemptions that has left a deep impression on the market so far. The interest rate risk management level of many financial institutions is worrying.

7. After the bond market fluctuates, what will be the subsequent trend?

Long-term Treasury yields are unpredictable.

Since 2024, on the one hand, there is no urgency to speed up the issuance of local government bonds, and on the other hand, due to the progress of debt reduction, the issuance of new local government bonds is significantly lower than the average level of previous years. In the first half of this year, the cumulative net financing of government bonds was 3.43 trillion yuan, accounting for 37.71% of the annual issuance plan, which is 43.36% lower than the financing progress in the same period of 2023.

Industry experts analyzed that at present, the market is blindly pursuing "less". In the second half of the year, once the issuance of government bonds accelerates, the market will reverse. This is also the reason why the central bank has been constantly speaking out to guide and warn of risks in recent times.

Xu Zhong believes that from the perspective of supply and demand, my country is currently in a period of economic transformation, with insufficient effective credit demand. In the short term, a large amount of funds have flowed into the bond market through wealth management and funds, and the strong demand has caused excessive trading of treasury bonds. At the same time, the supply of interest-bearing bonds, including government bonds, was insufficient in the first half of the year, resulting in an imbalance between supply and demand in the short term. As the supply of treasury bonds and other related interest-bearing bonds increases in the second half of the year, the supply and demand relationship will also change.

(This article comes from China Business Network)

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