Translation in English: The decline in credit bond yields narrows, and risk appe

Abstract

During the week of February 19th to February 23rd, the First Financial Research Institute's China Financial Conditions Daily Index had an average value of -2.12, which was a decrease of 0.23 from the week before the Spring Festival, and a year-to-date decrease of 0.58. Analyzing the components of the index, monetary easing was the primary factor driving the index lower last week. In the money market, liquidity in the interbank market was abundant, with key money market interest rates fluctuating around the policy rate. In the bond market, the pace of decline in credit bond yields slowed down, leading to a rebound in the spread between credit bonds and government bonds. In the stock market, the main A-share indices rose significantly last week, but the price-to-earnings (P/E) ratio remained at a low level since 2005.

In the first week after the Spring Festival, liquidity in the interbank market remained ample. In terms of trading volume, the average daily turnover of repurchase agreements in the interbank market rebounded to over 7 trillion yuan. Regarding the cost of funds, although the main money market interest rates fluctuated, they remained at relatively low levels overall, with the R007 and DR007 averages at 2.02% and 1.82%, respectively, fluctuating around the policy rate. After the Spring Festival, the demand for funds across various sectors, including the bond market, increased. Additionally, about 1.37 trillion yuan of reverse repurchase agreements matured last week. To meet the demand for funds and maintain market liquidity, the central bank expanded the scale of 7-day reverse repurchase agreements, injecting a total of 427 billion yuan during the week. On February 20th, the LPR rate for terms over five years was reduced from 4.2% to 3.95%, a decrease of 25 basis points. Following the LPR rate cut, the financing costs for banks fell in tandem, leading to a decrease in the financial conditions index.

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Last week, both the bond market's issuance and net financing significantly rebounded compared to the week before the Spring Festival. The total bond market issuance was 1.21 trillion yuan, an increase of 1.17 trillion yuan from the week before the festival; the net financing in the bond market was 236.019 billion yuan, an increase of 416.666 billion yuan from the week before the festival. Looking at the financing structure, government and financial sector bond financing rebounded significantly last week, while non-financial corporate sector bond financing shifted from net financing to net repayment. In the secondary bond market, yields on government bonds of all maturities decreased, with short-term government bond yields mainly affected by loose liquidity, and medium to long-term government bond yields mainly influenced by economic expectations. On February 23rd, Premier Li Qiang chaired a State Council executive meeting, proposing "to adhere to reform and innovation, strengthen supporting policy measures, and make persistent efforts to advance the implementation and effectiveness of a package of debt resolution plans," which led to a decrease in medium to long-term government bond yields. Credit bond yields continued to decline, but at a slower pace, and credit spreads rebounded.

Last week, the total financing amount in the A-share market was 620 million yuan, a decrease of 5.264 billion yuan from the week before the Spring Festival. Looking at the 4-week rolling average of A-share financing, it has remained at a low level since the fourth quarter of last year. In the secondary market, the main A-share indices rose significantly last week, with the Shanghai Composite Index up by 4.8%, the SME Index up by 2.6%, and the ChiNext Index up by 1.8%. Recently, market risk appetite, measured by the year-on-year growth rate of stock indices minus the yield on 10-year government bonds, has continued to improve. Last week, the weighted average P/E ratio of A-shares rebounded by 7.7% to 13.56, but it is still at a low level since 2005.

Main Text

I. Overview of China's Financial Conditions Index

During the week of February 19th to February 23rd, the First Financial Research Institute's China Financial Conditions Daily Index had an average value of -2.12, which was a decrease of 0.23 from the week before the Spring Festival, and a year-to-date decrease of 0.58.

Analyzing the components of the index, monetary easing was the primary factor driving the index lower last week. In the money market, liquidity in the interbank market was abundant, with key money market interest rates fluctuating around the policy rate. In the bond market, the pace of decline in credit bond yields slowed down, leading to a rebound in the spread between credit bonds and government bonds. In the stock market, the main A-share indices rose significantly last week, but the P/E ratio remained at a low level since 2005.

II. Money MarketIn the first week following the Spring Festival, the interbank market maintained ample liquidity. In terms of trading volume, the daily average trading volume of pledged repurchase agreements in the interbank market rebounded to over 7 trillion yuan. Regarding the cost of funds, although the main money market interest rates fluctuated, they remained at a relatively low level overall, with the average R007 and DR007 rates at 2.02% and 1.82%, respectively, fluctuating around the policy interest rate.

After the Spring Festival, the demand for funds of various types, including the bond market, rebounded. In addition, there was about 1.37 trillion yuan of reverse repurchase maturities last week. To meet the demand for funds of various types and maintain the stability of market liquidity, the central bank expanded the scale of 7-day reverse repurchase operations, with a total injection of 427 billion yuan within the week. On February 20th, the LPR rate for terms over 5 years was reduced from 4.2% to 3.95%, a decrease of 25 basis points. Following the reduction in the LPR rate, the financing costs for banks also decreased synchronously, leading to a decline in the financial conditions index.

1. Money Market Trading Volume and Interest Rates

Last week, the overall liquidity in the interbank market was ample. In terms of trading volume, the daily average trading volume of pledged repurchase agreements in the interbank market in the first week after the Spring Festival was 7.1 trillion yuan, significantly higher than the average of 4.6 trillion yuan in the week before the Spring Festival.

Regarding the cost of funds, the main money market interest rates fluctuated last week, overall fluctuating around the policy interest rate. In the overnight repurchase rate, the average R001 and DR001 rates for the week were 1.78% and 1.66%, respectively, with the average DR001 rate decreasing by 5.22 basis points compared to the week before the Spring Festival. In the 7-day repurchase rate, the average R007 and DR007 rates for the week were 2.02% and 1.82%, respectively, with the average R007 rate increasing by 16.6 basis points compared to the week before the Spring Festival, while the average DR007 rate decreased by 3.29 basis points.

Although there was a divergence in the interest rate trends between banks and non-bank financial institutions, the phenomenon of liquidity stratification between banks and non-bank financial institutions has been significantly alleviated. Last week, the average difference between R007 and DR007 was about 20 basis points.

2. Central Bank's Open Market Operations

In the week after the Spring Festival, the demand for social financing of various types, including the bond market, rebounded. In addition, the scale of reverse repurchase maturities last week was as high as 1.37 trillion yuan. To meet the demand for funds of various types and maintain the stability of market liquidity, the central bank expanded the scale of 7-day reverse repurchase operations last week, with a total injection of 427 billion yuan.

On February 20th, the central bank authorized the National Interbank Funding Center to announce the new LPR quotes, with the 1-year LPR remaining unchanged at 3.45%; the LPR for terms over 5 years was reduced from 4.2% to 3.95%, a decrease of 25 basis points. Following the reduction in the LPR quotes, the financing costs for banks also decreased synchronously, leading to a decline in the financial conditions index.

III. Bond MarketLast week, the bond market issuance and net financing both rebounded significantly compared with before the Spring Festival. Among them, the total issuance of the bond market was 1.21 trillion yuan, an increase of 1.17 trillion yuan from the week before the holiday; the net financing of the bond market was 236.019 billion yuan, an increase of 416.66 billion yuan from the week before the holiday. From the perspective of financing structure, bond financing of government departments and financial sectors rebounded significantly last week, while bond financing of non-financial corporate sectors changed from net financing to net repayment. From the perspective of the secondary bond market, the yields of treasury bonds of all maturities have declined. Among them, the yields of short-term treasury bonds are mainly affected by the easing of liquidity, while the yields of medium and long-term treasury bonds are mainly affected by economic expectations. On February 23, Premier Li Qiang presided over a State Council executive meeting and proposed "to persist in reform and innovation, strengthen supporting policy support, persevere in tackling tough problems, and further promote the implementation of a package of debt reduction plans". These measures have led to a decline in the yields of medium and long-term treasury bonds. Credit bond yields continued to decline, but the rate of decline slowed down, and credit spreads rebounded. 1. Bond market issuance Last week, the bond market issuance and net financing both rebounded significantly compared with the period before the Spring Festival. Among them, the total issuance of the bond market was 1.21 trillion yuan, an increase of 1.17 trillion yuan from the week before the festival; the net financing of the bond market was 236.019 billion yuan, an increase of 416.66 billion yuan from the week before the festival. From the perspective of financing structure, bond financing of government departments and financial departments rebounded significantly last week, while bond financing of non-financial corporate departments changed from net financing to net repayment. From the perspective of government departments, last week, the net financing of treasury bonds was 159.9 billion yuan, and the net financing of local government bonds was 28.989 billion yuan, driving the net financing of the entire government department to 188.889 billion yuan. From the perspective of the financial sector, last week, the net financing of interbank certificates of deposit was 246.57 billion yuan, the net repayment of policy bank bonds was 45.27 billion yuan, and the net repayment of other financial bonds was 28.9 billion yuan, driving the net financing of the entire financial sector to 169.4 billion yuan. From the perspective of the non-financial corporate sector, all types of non-financial corporate sector bonds were net repaid last week, including a net repayment of 51.171 billion yuan for medium-term notes, 42.52 billion yuan for short-term bonds, 12.815 billion yuan for asset-backed securities, and a net repayment of 122.271 billion yuan for the entire non-financial corporate sector. Compared with the same period in previous years, the growth rate of many bond financing balances this year has increased compared with the same period last year. As of February 25, the year-on-year growth rate of government bond balances was 15.9%, an increase of 2.4 percentage points from the same period in 2023; the year-on-year growth rate of financial sector bond balances was 10%, an increase of 3.5 percentage points from the same period in 2023; the year-on-year growth rate of non-financial corporate sector bond balances was 1.5%, an increase of 2.2 percentage points from the same period in 2023. 2. Bond yield trend 1) Interest rate bonds Last week, the yields of treasury bonds of all maturities fell. From the short-term perspective, affected by the abundant liquidity in the interbank market, the yields of January, March, June and 1-year treasury bonds fell by 8.75bp, 9.42bp, 7.07bp and 9.88bp respectively last week. From the medium and long-term perspective, on February 23, Premier Li Qiang presided over the State Council executive meeting and once again proposed "to persist in reform and innovation, strengthen supporting policy support, persevere in advancing, and further promote the implementation of a package of debt reduction plans". These measures have led to a decline in medium and long-term treasury bond yields. Last week, the yields of 2-year, 5-year, 10-year and 30-year treasury bonds fell by 4.21bp, 1.98bp, 1.74bp and 5.04bp respectively. From the perspective of treasury bond term spreads, the treasury bond term spreads have rebounded recently, which is mainly due to the fact that the decline in short-term treasury bond yields is greater than that of medium and long-term treasury bond yields. As of February 23, the average term spread between 10-year and 1-year treasury bonds was 58.51bp, up 8.14bp from the previous week. Looking at the year, the term spread of treasury bonds has increased by 15.53bp since the beginning of the year.2) Credit Bonds

Last week, the yield on credit bonds continued to decline, but the pace of decline slowed down. Among AAA-rated bonds, the yields on 5-year corporate bonds, corporate bonds, and asset-backed securities decreased by 0.65 basis points (bps), 1.29 bps, and 40.68 bps, respectively. For AA-rated bonds, the yields on 5-year corporate bonds, corporate bonds, and asset-backed securities decreased by 0.66 bps, 7.41 bps, and 0.43 bps, respectively.

Looking at the spread between credit bonds and government bonds, due to the slower pace of yield decline on credit bonds, the spread between credit bonds and government bonds rebounded last week. For AAA-rated bonds, the spreads between corporate bonds, corporate bonds, and asset-backed securities and government bonds increased by 1.33 bps, 0.69 bps, and 1.3 bps, respectively. For AA-rated bonds, the spreads between corporate bonds and asset-backed securities and government bonds increased by 1.33 bps and 1.56 bps, respectively.

IV. Stock Market

Last week, the total financing amount of A-shares was 620 million yuan, a decrease of 5.264 billion yuan compared to the week before the Spring Festival. Looking at the 4-week rolling average data of A-share financing, since the fourth quarter of last year, A-share financing has been at a relatively low level.

From the secondary market perspective, last week, the main A-share stock indices rose significantly, with the Shanghai Composite Index up by 4.8%, the SME Index up by 2.6%, and the ChiNext Index up by 1.8%. Recently, the market's risk preference, measured by the year-on-year growth rate of stock indices minus the yield of 10-year government bonds, has continued to rebound. Last week, the weighted average price-to-earnings ratio of A-shares rebounded by 7.7% to 13.56, but it is still at a low level since 2005.

1. Primary Market

Last week, the total financing amount of A-shares was 620 million yuan, a decrease of 5.264 billion yuan compared to the week before the Spring Festival. Looking at the 4-week rolling average data of A-share financing, since the fourth quarter of last year, A-share financing has been at a relatively low level.

2. Secondary Market

Last week, the main A-share stock indices generally rose, with the Shanghai Composite Index up by 4.8%, the SME Index up by 2.6%, and the ChiNext Index up by 1.8%. For the year, the Shanghai Composite Index has accumulated a gain of 0.5%, while the SME Index and the ChiNext Index have accumulated declines of 7.5% and 7.1%, respectively. Recently, the market's risk preference, measured by the year-on-year growth rate of stock indices minus the yield of 10-year government bonds, has continued to rebound.Last week, the trading volume of A-shares experienced a decline, but the price-to-earnings (P/E) ratio rebounded. In terms of trading volume, the average daily turnover of A-shares was 896.2 billion yuan, which dropped from the pre-holiday week's average of 973.9 billion yuan. Regarding the P/E ratio, the weighted average P/E ratio of A-shares increased by 7.7% to 13.56, but it remains at a low level since 2005. Last week, the difference between the balance of margin financing and short selling in A-shares slightly increased, rising from 1.33 trillion yuan before the holiday to 1.37 trillion yuan.