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the issuance of local government bonds accelerated significantly in august, with monthly issuance hitting a new high this year. the peak of government bond supply this year has shifted back overall. minsheng bank predicts that the supply of local government bonds in september and october will remain substantial, and the remaining quota of new local government bonds will be basically issued by the end of october and used up by the end of the year.

at the same time, on the funding side, the disturbance of government bond supply to liquidity has become apparent, and commercial banks have increased their reliance on issuing interbank certificates of deposit to supplement their liabilities. after fluctuating upward since august, the issuance cost of interbank certificates of deposit remains high, reflecting the increasing pressure on bank liabilities.

at present, the market is concerned about whether the central bank will ease the demand for the bank system to make up for its liabilities by reducing the reserve requirement ratio. if the reserve requirement ratio is reduced, the deposit rate is expected to decline. however, there are also views that it is not ruled out that the central bank will release funds through alternative means such as buying bonds. the difference between reducing the reserve requirement ratio and buying treasury bonds is that the former can release funds all at once, and the reverse operation is more difficult, while the latter can be operated in batches, and funds can also be recovered by selling treasury bonds.

the issuance of local government bonds peaked in august

in august, the issuance of local government bonds accelerated significantly. according to the statistics of enterprise early warning,in august, the issuance of local government bonds was approximately 1,199.623 billion yuan (net issuance was 819.257 billion yuan), the largest monthly issuance so far this year.compared with the issuance in previous months, the main sources of the increase are new general bonds and new special bonds.

specifically, in august, local governments issued 252.383 billion yuan of general bonds (an increase of 16.53% from the previous month), including 141.401 billion yuan of new general bonds (an increase of 266.77% from the previous month) and 110.982 billion yuan of refinancing general bonds (a decrease of 37.66% from the previous month); they issued 947.240 billion yuan of special bonds (an increase of 91.65% from the previous month), including 796.489 billion yuan of new special bonds (an increase of 182.97% from the previous month) and 150.751 billion yuan of refinancing special bonds (a decrease of 29.15% from the previous month).

if we distinguish between general bonds and refinancing bonds, local governments issued a total of 937.89 billion yuan in new bonds and 261.73 billion yuan in refinancing bonds in august.

generally speaking,the second and third quarters are the peak period for local government bond issuance. the reason is that the issuance quota for the first quarter has not yet been issued, and local governments are cautious in issuing bonds; the fourth quarter is close to the end of the year, and the funds raised from bond issuance may not be used. compared with the previous two years, the progress of local government bond issuance this year has been significantly delayed, and may be concentrated in the third quarter. therefore, the market expects that the scale of local government bond supply in september and october will still be considerable.

according to calculations by china minsheng bank, based on the issuance plans announced by various regions, the scale of new local debt issuance in september is 738.1 billion yuan. combined with the planned repayment scale of 178.7 billion yuan, the scale of local debt issuance in september is expected to be around 900 billion yuan.

at the same time,according to the budget arrangement of the ministry of finance at the beginning of the year, the limit for new local government bonds in 2024 is 4.62 trillion yuan. from january to august, 3.0838 trillion yuan of new local government bonds have been issued nationwide, leaving a remaining limit of 1.5362 trillion yuan.minsheng bank expects that the remaining quota of new local government bonds will be basically issued by the end of october and used up before the end of the year.

minsheng fixed income's tan yiming team estimates that in september, the net financing of local government bonds was about 740 billion yuan, the net financing of treasury bonds was about 170 billion yuan, and the net financing of government bonds was 910 billion yuan. the scale of net financing of government bonds in september was second only to may and august, and the supply pressure is still not low.

as for the reasons for the slow progress of local government bond issuance in the first half of the year, wu zhiwu, senior director of the research and development department of china securities credit investment corporation, believes that it may be mainly related to factors such as the stricter review of new local special bonds and the issuance of additional treasury bonds in the first half of last year, which squeezed the issuance space of local government bonds.

the funding side is disturbed by the supply of government bonds

it is reported that the investors of local government bonds are relatively single, and more than 80% are purchased and held by commercial banks. as the largest underwriter of local government bonds, commercial banks have the advantage of low liability costs and the overall comprehensive returns of allocating local government bonds are relatively good.

the reporter noted that due to factors such as the prohibition of "manual interest supplements", the phenomenon of "deposit migration" was obvious this year, and banks were under great debt pressure. in addition, the recent increase in local government debt supply has had a strong crowding-out effect on liquidity, and the funding side of the banking system has been disturbed.recently, commercial banks have further strengthened their reliance on issuing interbank certificates of deposit to supplement their liabilities.

in the primary market,after fluctuating upward since august, the issuance cost of interbank certificates of deposit still remains at a relatively high level. on september 11, taking the quotation of one-year certificates of deposit as an example, the issuance rates of joint-stock banks were mostly 1.93% or above, and some joint-stock banks exceeded 2.00%. the issuance rates of urban and rural commercial banks were generally higher than 2.00%.

in the secondary market,according to historical trends, the yield of 1-year interbank certificates of deposit is close to the yield of 5-year treasury bonds. however, since mid-august, the yield of interbank certificates of deposit has continued to rise, causing the spread between the two to start to widen significantly. as of september 10, the yield of 1-year interbank certificates of deposit was 1.76%, and the yield of 5-year treasury bonds was 1.97%, with a spread of 21bp.

liang weichao's team at china post fixed income believes that, based on experience, when the monthly net financing scale of government bonds exceeds one trillion yuan, the disturbance to liquidity will be significantly amplified, which is the main marginal driver of the increased volatility of the funding surface since august. from this factor, the impact of government bond issuance on liquidity will exist in september and even october.

however, the divergence between the interbank deposit certificate yield and the short-term treasury bond yield is not only due to the relatively high deposit certificate yield, but also related to the continuous decline in the short-end treasury bond yield.

jiang peishan's team at western securities believes that the government bond supply shock has affected the supply and demand of interbank certificates of deposit. the two possibilities of rising credit demand at the end of last month and the large state-owned banks' greater funding pressure in taking on government bonds both mean that the banking system needs to use interbank certificates of deposit to supplement funds. at the same time, the large state-owned banks and the central bank cooperated in buying short and selling long to accelerate the downward trend of short-term treasury bond interest rates, exacerbating the widening of interbank certificates of deposit and short-end treasury bond interest rates.

a securities trader said:the ban on "manual interest supplement" was implemented in april this year. since then, banks have been using certificates of deposit to supplement liabilities. previously, the net financing volume of certificates of deposit increased, but the issuance rate went down, indicating that the pressure on banks to issue certificates of deposit to supplement liabilities was not that great. after august, the net financing volume of certificates of deposit remained high, but the interest rate of certificates of deposit turned around and rose, which shows that banks still lack long-term liabilities on their balance sheets.

he further stated,with the expectation of concentrated supply of government bonds in september and october, after banks purchase government bonds, the funds will be reflected in the central bank's balance sheet in the form of fiscal deposits. if these funds cannot be quickly implemented in projects, the funds may be deposited for a long time, which will consume the bank's excess reserves and aggravate the current situation of the banking system lacking "long money".

market focus on whether the reserve requirement ratio will be lowered

as the concentrated supply of government bonds intensifies the demand for the banking system to replenish its liabilities, the market believes that the central bank may further cut the reserve requirement ratio in the future.

the above-mentioned securities firm believes thatas the concentrated supply of bonds exacerbates banks' shortage of "long money", the central bank may hedge by lowering the reserve requirement ratio, but it does not rule out releasing funds through alternative means such as buying bonds.the difference between lowering the reserve requirement ratio and buying government bonds is that the former can release funds all at once, and the reverse operation is more difficult, while the latter can be done in batches, and funds can also be recovered by selling government bonds. "if the central bank does not buy bonds, the probability of lowering the reserve requirement ratio will be greater; conversely, if the central bank conducts a net bond purchase operation, the probability of lowering the reserve requirement ratio will decrease."

wen bin, chief economist of china minsheng bank, believes that although the supply of local government bonds increased significantly in the third quarter, considering that the increased volatility in equity markets is causing funds to continue to flow into the bond market for risk aversion, and with the gradual easing of internal and external constraints, the pace of monetary easing may accelerate, and there is still room for reserve requirement ratio cuts and interest rate cuts. the asset shortage in the bond market may continue, and the central bank may enter the market to sell treasury bonds to guide treasury bond yields back to a reasonable range.

jiang peishan's team at western securities believes that the current interbank deposit quota of major banks is limited. in the short term, large-scale mlf can ease the medium- and long-term debt demand of the banking system, but the cost of funds is high, which is not very helpful in easing the pressure on the net interest margin of the banking system. reducing the reserve requirement ratio and purchasing treasury bonds on a large scale can both inject long-term liquidity, which is better for improving the current funding situation.considering the large amount of mlf maturing in the fourth quarter, the low probability of the central bank purchasing large-scale government bonds, and the fact that the central bank mentioned again recently that there is still room for rrr cuts, the necessity and possibility of subsequent rrr cuts are higher. if the rrr cut is implemented, the deposit rate is expected to decline.