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recently, yin ruizhe, an analyst at sdic securities, released a new report pointing out that through weekly estimates of the trading status of overseas capital buying interbank certificates of deposit, the scale of overseas capital buying interbank certificates of deposit in august was about 55.5 billion yuan, a significant drop from the monthly average of 88.9 billion yuan since november last year. in the first week of september, the scale of overseas capital buying interbank certificates of deposit further slowed to 2.8 billion yuan, and the marginal support for the interbank certificates of deposit market was significantly weakened.

a foreign exchange trader at a hong kong bank told reporters that since august, as the usd/rmb exchange rate has rebounded from 7.25 to around 7.12, overseas asset management institutions and fund companies have reduced their allocations to domestic interbank certificates of deposit. it is reported that the appreciation of the rmb exchange rate has caused the actual excess yield of bond spread transactions to shrink relatively.

image source: tonghuashun ifind

however, domestic financial institutions have recently shown a growing willingness to allocate interbank certificates of deposit.. both bank wealth management subsidiaries and insurance funds have increased their holdings of interbank certificates of deposit in the underlying asset allocation process. a person from a bank wealth management subsidiary told reporters that since august, affected by factors such as the central bank's entry into the market to buy short and sell long, and the easing of monetary policy, the yield on one-year treasury bonds has continued to fall to a low of 1.377% this year, which is lower than the yield on maturity of interbank certificates of deposit (about 1.95%) during the same period. therefore, they have increased their allocation of interbank certificates of deposit.

in his opinion, domestic and foreign capital currently have very different allocation interests in interbank certificates of deposit, mainly due to differences in their respective investment strategies. as far as domestic financial institutions are concerned, as the current asset shortage in the fixed income market continues, market participants are working hard to improve the "cost-effectiveness" of the underlying asset allocation of wealth management products, which can not only take into account high security and high liquidity, but also obtain relatively higher returns, adding a "safety cushion" to the stable operation of the product.

bond spread trading "ebbs", with foreign investment buying interbank certificates of deposit of 2.8 billion yuan in the first week of september

since the beginning of this year, bond spread trading has been hot, which is a major driving factor for overseas capital to rush to increase its holdings of short-term domestic bonds and interbank certificates of deposit. it is reported that bond spread trading is mainly because overseas capital believes that the sum of the potential appreciation return of the rmb in the future and the return rate of holding short-term bonds to maturity is expected to exceed the yield of us bonds in the same period, which has led them to increase their holdings of short-term domestic 1-year bonds and interbank certificates of deposit.

hua xi securities released a report pointing out that taking july 31 as an example, the closing price of the 1-year usd/rmb swap point (the difference between the forward exchange rate and the spot exchange rate) was -2892 basis points. given that the rmb spot exchange rate on that day was 7.2261, the corresponding forward exchange rate was 7.2261-0.2892=6.9369. it can be inferred that overseas investment institutions believe that the future appreciation space of the rmb exchange rate is 4%.

a report by west china securities pointed out that by locking in a 4% return on the appreciation of the rmb through a one-year foreign exchange swap transaction and then investing in one-year government bonds (the yield to maturity was 1.42% at the end of july), overseas capital could obtain a comprehensive return of 5.42%, which was higher than the 4.73% yield on one-year u.s. treasury bonds at the time.

this undoubtedly attracted a large number of overseas capitals to participate in the above-mentioned bond interest rate spread transactions and continue to increase their holdings of domestic short-term government bonds. in this process, more and more overseas capitals have found that investing in interbank certificates of deposit to carry out bond interest rate spread transactions has a more lucrative profit margin. compared with the one-year government bond yield that has continued to fall below 1.5%,the yield on 1-year interbank deposit certificates is basically maintained at 1.8%-2%。

this makes interbank certificates of deposit increasingly the preferred product for overseas capital to conduct bond interest rate spread trading.

yin ruizhe pointed out in the report that in this round of bond spread trading, the main arbitrage investment target of overseas capital is interbank certificates of deposit. since november last year, the total scale of interbank certificates of deposit purchased by overseas capital has reached about 800 billion yuan, with an average purchase volume of 88.9 billion yuan at the end of the month. as of the end of july, the scale of interbank certificates of deposit held by overseas capital reached 1090.9 billion yuan, accounting for about 6.16%. in addition, zhao zhixuan, a strategist at bloomberg asia, also said that this year, overseas investors have significantly increased their purchases of interbank certificates of deposit, and the share of holdings has risen to 6.15% at the end of july, the highest level since 2015, slightly lower than the share of overseas investors in chinese government bonds (7.16%).

but,affected by the significant appreciation of the rmb exchange rate in august, the attitude of overseas capital towards interbank certificates of deposit quickly changed from "pursuing" to "wait and see".the foreign exchange trader told the reporter that since august, the enthusiasm of overseas fund companies and asset management institutions for buying domestic one-year treasury bonds and one-year interbank certificates of deposit has been declining. in the first week of september, the scale of overseas capital buying interbank certificates of deposit further slowed to 2.8 billion yuan, and the marginal support for the interbank certificate of deposit market has significantly weakened. behind this is that the continued appreciation of the rmb exchange rate has "swallowed" a considerable proportion of exchange gains, while the actual rate of return on bond interest rate spread trading has shrunk significantly.

the report released by yin ruizhe believes that the carry space for foreign capital on rmb bond assets has reached a turning point at the end of july this year. with the continued appreciation of the rmb in august, the foreign exchange swap points of the us dollar against the rmb have rebounded accordingly - from the lowest point of -2986.5 to -2126 (the corresponding future appreciation space of the rmb has decreased), resulting in the actual carry space of "1-year certificate of deposit + exchange income" minus the 1-year us treasury yield narrowing from the highest 123 basis points to about 90 basis points, the lowest value since november last year.

image source: china currency network

the foreign exchange trader bluntly stated that after the actual arbitrage space of bond interest rate spread trading falls back to 90 basis points, overseas capital's interest in investing in interbank certificates of deposit to engage in bond interest rate spread trading will obviously cool down.

in his view, unless the federal reserve cuts interest rates more than expected in september, causing a sharp drop in the us dollar index and the one-year us treasury yield, it will be difficult for overseas asset management institutions and fund companies to replicate the enthusiastic investment sentiment in bond interest rate spread trading in the first half of the year.

the recent maturity yield of 1-year interbank deposit certificates is "inverted" with the interest rate of 5-year government bonds

compared with foreign capital, domestic financial institutions have shown increasing enthusiasm for investment. a person from the above-mentioned bank wealth management subsidiary told reporters that since august, they have been increasing their allocation of one-year interbank certificates of deposit.on the one hand,faced with the increasing risk of long-term bond investments, they are actively reducing maturity mismatch risks to avoid the greater investment risk of short-term deposits and long-term investments caused by the rebound in long-term government bond yields (falling bond prices);on the other hand,the yield on one-year interbank certificates of deposit is higher than that on one-year treasury bonds, and its effect on boosting the yield on wealth management products is more obvious.

he said frankly that the current 1-year interbank deposit yield is around 1.95%, which is more cost-effective than the 1-year treasury bond yield of 1.42%. with the recent decline in treasury bond trading activity, interbank deposits with relatively good liquidity can still meet the requirements of wealth management products for the rapid realization of underlying assets. the reporter learned that the recent trend of 1-year interbank deposits is relatively "independent", which is also an important factor for financial institutions such as bank wealth management subsidiaries and insurance companies to choose to actively allocate to gain relatively high returns.

the report released by yin ruizhe believes that while short-term interest rates have hit new lows, the trend of certificate of deposit interest rates has been relatively independent.the 1-year interbank deposit certificate not only deviates from the trend of short-term treasury bonds, but also shows a rare inversion with the 5-year government bond interest rate.it is reported that the marginal support from overseas capital purchases is slowing down, and there is a "gap" in the medium- and long-term liabilities of banks, which has led to a relative decrease in the amount of capital outflows by large banks recently, keeping the interest rate on bank certificates of deposit at a relatively high level.

image source: china currency network

the above-mentioned bank wealth management subsidiary pointed out that the yield of 1-year interbank certificates of deposit has been higher than that of 1-year treasury bonds by more than 50 basis points recently. another important support is the high cost of borrowing funds in the current financial market. data shows that as of 17:00 on september 10, the weighted interest rates of interbank overnight and 7-day pledged repurchases (dr001 and dr007) were 1.9409% and 1.8612% respectively, which invisibly supports the relatively high issuance rate of 1-year interbank certificates of deposit.

image source: china currency network

a person from the bank's wealth management subsidiary pointed out that as the central bank approaches the pace of reducing the reserve requirement ratio, once the market's liquidity returns to easing and the weighted interest rate of interbank pledged repurchases declines, the one-year interbank deposit rate will also weaken accordingly. at that time, financial institutions will have to find new assets that balance security and relatively high returns to support the stable operation of wealth management products.