The overnight interest rate of the first day after the fall of the benchmark fell below 1percent: why is the bond rising and the exchange rate stable?

 The overnight interest rate of the first day after the fall of the benchmark fell below 1percent: why is the bond rising and the exchange rate stable?

According to the 21st century economic report, there were 50 billion reverse repos due on the same day, so the central bank realized a net liquidity investment of 750 billion, the fund aspect showed a loose trend, and the overnight fund interest rate fell again below 1%. The change of market interest rate has an effect on the stock exchange bond, but the bond market is the most obvious.

The reporter learned that the bond market was strengthened due to the abundant liquidity, the main contract of 10-year Treasury bond was up 0.18%, the inter-bank cash bond yield was down more than 1bp, and the primary market demand was better. The reduction of the standard has had a real easing effect on the market liquidity, and the interest rate has also declined, which shows that the market expectation is relatively optimistic. Yang Weiyi, chief analyst at BOC fixed income, told 21st century economic reporter.

For the next market interest rate trend, the interviewees think that they need to pay close attention to the new MLF in mid January and whether the LPR interest rate will be lowered. Considering that this reduction will reduce the capital cost of the bank, the first LPR quotation rate in the new year will probably go down.

Grab debts

A large state-owned bank fund trader told 21st century economic news that on January 6, the inter-bank market was generally loose. In early trading, banks have been active in financing, driving market interest rates down, among which there are more inquiries across the 28 day period of the Spring Festival.

Lets first look at Shibor trend, which is an important vane to observe the trend of capital price. According to data from China monetary network, Shibor declined in all periods on January 6, with overnight varieties down 15.9bp to 1.003%, 7-day varieties down 13bp to 2.219%, 14-day and 1-month Shibor all down. It is worth noting that the overnight capital interest rate of some transactions is even lower than 1%.

If we look at it for a long time, the market fund interest rate has continued to decline from three trading days since January 2: take 7-day Shibor as an example, its interest rate dropped from 2.737% on December 31, 2019 to 2.219% on January 6, down 51.8bp.

According to the reporter, the reason for the downward trend of market interest rate is the disappearance of seasonal factors. In the capital market, the funds at the end of the general quarter and the end of the year will be extremely tight, and the fund interest rate will fall after the cross quarter or cross year. The more important reason is that the 800 billion capital released by the reduction of standards flows to the market. After the standard reduction on January 4, 2019, the capital interest rate also fell sharply.

It is worth noting that the 7-day Shibor is lower than the 7-day central bank reverse repo rate (2.5%) in three trading days in the new year. In other words, the policy interest rate and the market interest rate hang upside down, which means that if the bank gets the reverse repo fund from the central bank and lends it out, it will lose money.

The market interest rate is so low, so its of little significance to give (funds). Next, we will see whether the interest rate will pick up after paying taxes in the middle of the year. Said the capital trader of a city commercial bank in East China. The above-mentioned fund traders of state-owned large banks reminded that in the afternoon of January 6, there was a slight tightening of the fund, less and less overnight financing, and it was difficult to balance the demand of non-bank institutions to make up positions in the afternoon.

Generally speaking, changes in market interest rates have an impact on stock exchange bonds, especially bond market. The logic is that because of the low interest rate, financial institutions can roll in overnight funds with lower cost to allocate long-term bond arbitrage. On January 6, the inter-bank pledge style repo reached a record high of 4.46 trillion.

In the context of increasing the risk of bond default, a large number of funds poured into the interest rate bond market, promoting the bond market to strengthen. On January 6, the Treasury bond futures were all higher, the inter-bank cash bond yield was about 1bp lower - the yield of the 10-year national development active bond 190215 was 0.99bp lower to 3.5750%, and the yield of the 10-year Treasury bond 190015 was 0.75bp lower to 3.1325%.

The expectation of the whole market is relatively optimistic, and bond yields may continue to decline. Yang is the name of Yi.

A bond market trader at a securities firm in Shanghai said that the current enthusiasm for grabbing bonds in the primary and secondary markets has made people think of the second half of 2016. According to wind data, the yield of 10-year Treasury bonds fell below 2.7% in the second half of 2016, which was called asset shortage. The so-called asset shortage does not mean that there are no assets to be invested, but that there are fewer and fewer high-quality assets with high yields, and a large number of funds flow into the market to buy interest-rate bonds, thus driving the bond yield down.

Qu Qing, chief economist of Jianghai securities, said that under the influence of factors such as the continuous exertion of counter cyclical adjustment policy, the marginal tightening of capital after the falling of the standard, the spring agitation structural market of the stock market or the brewing, the long-term interest rate in the first quarter of 2020 will continue to decline with limited space, so we need to be alert to the risk of the long-term treasury bond yield turning upward.

In view of the high CPI and the current price constraints, it is feasible for the central bank to reduce the banks capital cost by reducing the reserve. -Shot by song Wenhui

LPR quotation rate will go down in January

A foreign bank executive said that compared with the current performance of Chinas bond market and stock market, foreign investors are increasing their holdings of Chinas bonds and stocks. Although the interest rate of Chinas market has declined after the reduction of the standard, the short-term interest rate has been inversely linked to the short-term interest rate of the US dollar, but foreign investment is still flowing in, supporting the RMB exchange rate..

Data shows that on January 6, the exchange rate of RMB against the US dollar hovered around 6.97, with no significant decline, even slightly higher than the previous trading day.

As soon as we talk about reducing the standard, we will say that it is a strong stimulus. As soon as we talk about a strong stimulus, the RMB will depreciate. In fact, this is not the case. Any problem should be analyzed in detail. Monetary easing does not mean that the exchange rate is bound to fall, and the reduction of reserve does not mean that the RMB is bound to depreciate. Guan Tao, former director of the balance of payments Department of the State Administration of foreign exchange, said, exchange rate is a relative concept, which depends not only on what happens to itself, but also on what happens internationally.

In terms of interest rate, the interest margin between China and the US 10-year bonds is as high as 130bp, which is attractive to foreign investors. However, the overnight trading is reversed: the overnight trading in the overseas dollar market is 1.46% - 1.55%, while the overnight trading in the domestic RMB market is about 1%.

In 2019, the overnight fund interest rate in China will be around 2%, which should be lower this year, but the overnight interest rate of 1% will not be normal. Said the foreign bank executive. In his opinion, under the influence of tax payment, reduction of reserve, issuance of local bonds, cash withdrawal during the Spring Festival and other factors, the maturity and return of funds in January are expected to reach more than 300 billion yuan. Even if part of the reserve reduction hedge is involved, it will still face a funding gap of more than 200 billion yuan, and the interest rate may rise slightly.

According to wind data, there will be another 257.5 billion liquidity maturities in January, all of which are tmlf.

Im not very optimistic about the future funding. Especially under the influence of the Spring Festival effect, the fund interest rate will probably rise. The central bank may create a new MLF in the middle of the year, but the MLF interest rate will remain stable and the LPR quotation will go down, said Yang

In August 2019, the central bank pushed forward the marketization reform of loan interest rate. After the reform, LPR refers to MLF, and the loan interest rate anchors LPR. So far, LPR has made five offers. At present, 1-year varieties are reported at 4.15%, 16 BP lower than the old LPR before reform; 5-year varieties are reported at 4.80%, 5 BP lower than the quotation in August, the main driving factors of which are the decrease of MLF interest rate and the decrease of standards, which drive the decrease of bank capital cost.

According to the schedule, the first LPR quotation for the new year will be made on January 21. Li Chao, chief Macro Analyst of Huatai Securities, said that in view of the high CPI, the direct reduction of policy interest rate to guide the LPR downward is currently constrained by the price, and it is more feasible for the central bank to reduce the banks capital cost by reducing the reserve. The quotation in January is similar to that in September 2019, which brings about a downward effect of LPR. On January 21, this year, LPR may decline by 5bp.

Source: responsible editor of 21st century economic report: Yang bin_nf4368