Summary of Key Points
Since June, bond market volatility has significantly increased, mainly due to factors such as the shift in funding conditions from an "extremely loose" state to a "surprisingly tighter" one, and new regulations on interbank brokerage services that have introduced fees. While the current disruptions in funding conditions are gradually easing, the market remains concerned about the ongoing impact of these new regulations and the macroeconomic data for June. In the medium to long term, the pace of bond supply and the investment behavior of institutions, particularly insurance funds, will be key determinants. Notably, the "rigid" commitment of insurance funds to purchasing ultra-long-term bonds (such as 30-year government bonds) may begin to soften.
Detailed Analysis
1. Recent Bond Market Volatility: Tightening Funding Conditions and New Regulations as Major Drivers
In the first half of this year, the bond market experienced initial fluctuations followed by a period of steady growth, but since June, it has entered a phase of high volatility. There are two main reasons for this:
- Sudden Tightening of Funding Conditions: Previously, funding conditions were extremely loose (for example, the cost of borrowing short-term funds was very low), but in June, they suddenly tightened (it became more difficult and costly to borrow money), leading to a noticeable increase in the yields on long-term bonds (such as 10-year and 30-year government bonds).
- New Brokerage Regulations: Starting in July, interbank brokerage services require contracts to be signed before fees can be charged. Non-bank institutions (such as funds and securities asset management companies), which earn management fees (and pay interest to their clients), are unable to afford these service fees, resulting in reduced trading activity and affected liquidity.
Interestingly, on July 7th, when the A-share market plummeted, the bond market did not experience a typical rebound (as it usually would in such situations), indicating that the impact of these factors outweighed the safe-haven demand from the stock market.
2. Is the Tightening of Funding Conditions Ending? Pressure Relaxes After the Cross-Qtr Period, Central Bank Signals Indicate a Looser Policy
Funding conditions have been a major concern for the bond market throughout the second quarter, but the pressure has begun to ease after June:
- Seasonal Factors: Loan disbursements are generally weaker in July, and the issuance of government bonds is also lower, so funding costs (the cost of borrowing money) tend to be lower for the year.
- Central Bank Actions: On July 6th, the central bank restarted 3-month reverse repurchase operations (basically, lending funds to financial institutions with the obligation to return the bonds at maturity), injecting a net amount of 49.5 billion yuan and ending the tightening measures that had been in place since March. Although 59.5 billion yuan was withdrawn on July 7th, market funding conditions remained loose—short-term interest rates (such as DR001) only increased by less than 0.01%, while DR007 even decreased, indicating that funding conditions are not as tight as before.
Xingye Securities believes that funding conditions are likely to return to a more "spontaneously loose" state in July.
3. New Brokerage Regulations: Non-Bank Institutions Complain about the High Fees, but the Impact Will Gradually Subside
The new regulations require that all interbank transactions must be conducted through licensed brokers, and fees must be paid in advance. Different institutions have reacted differently:
- Banks Are Unaffected: Banks earn interest on their bond investments, which can cover the service fees, so most have already signed the contracts.
- Non-Bank Institutions Face Challenges: Non-bank institutions, such as funds and securities asset management companies, earn management fees (from their clients), and since these fees account for a large proportion of their income, they were reluctant to sign the contracts, affecting trading liquidity. However, industry insiders expect that all parties will eventually make concessions (such as reducing the fees). Once non-bank institutions start signing the contracts more frequently, the impact of the new regulations will gradually diminish. It is important to note, however, that if brokers refuse to quote prices for smaller institutions, these firms may struggle to find buyers when they need to sell bonds urgently, which could lead to short-term volatility.
4. Insurance Fund Bond Investments: The "Rigid" Commitment to Ultra-Long-Term Bonds May Weaken, with a Potential Buying Window in the Third Quarter
Insurance funds are significant long-term buyers in the bond market, especially for ultra-long-term bonds (such as 30-year bonds). However, the situation has changed:
- Reduced Bond Investments in the First Half of the Year: Insurance funds focused more on secondary bond funds (which can invest in stocks) during the first half of the year, as they anticipated a strong stock market and weaker bond performance. Additionally, the proportion of dividend-paying insurance products increased, reducing the need for ultra-long-term bonds to match their long-term liabilities.
- Hastiness in June: Some insurance funds rushed to buy ultra-long-term bonds in June to meet their targets for the half-year period, but this aggressive buying may come to an end.
- Potential Buying Window in the Third Quarter: Zhongtai Securities believes that August and September of this year will be the best times for insurance funds to invest in bonds, aside from March. CITIC Securities argues that insurance funds are simply waiting for more favorable interest rates before making large purchases again. However, it is also noted that their commitment to buying ultra-long-term bonds may be weakening, but it cannot be assumed that they will continue to do so indefinitely.
5. Medium to Long-Term Bond Market Trends: Supply Will First Slow Down Then Speed Up, with Small and Medium-Sized Banks and Financial Management Funds Becoming New Focuses
- Bond Supply: The net issuance of government bonds in July was approximately 1.2 trillion yuan (similar to May), and it is expected to rise to 1.35-1.44 trillion yuan in August and September. Moreover, the issuance of local government bonds was slower than planned in early July, so the pressure may shift to the middle and late parts of the year.
- New Sources of Demand: In addition to insurance funds, the additional demand in the bond market in July will mainly come from two sources: small and medium-sized banks (which have been underinvesting and may need to increase their holdings) and financial management funds (whose returns are low, prompting some of them to shift towards bonds).
Overall, short-term volatility in the bond market may subside, but in the medium to long term, attention will continue to be paid to macroeconomic data, the investment behavior of insurance funds, and the supply of bonds. For individual investors, stability in the bond market may be more important than growth, especially as the potential returns on ultra-long-term bonds need to be re-evaluated.