After experiencing the biggest and the most long-lasting adjustment ever, bond market seems to have begun to be somewhat immune to bearish performance.
Chinese regulators have released a slew of policies since last week, setting a strict keynote for regulation at the beginning of this year. But adjustment in bond market slows down gradually. Yield of cash bond fluctuated at a narrow range, while that of national bond futures rose all the way from a high opening on January 8.
Market participants pointed out that capital supply eased at early this year, and bond yield has been already high now, bringing certain demand for transaction. But the major influential factors including stable economy and tough polices haven’t changed, making it hard for bond yield to decline sharply. Therefore, it is still a better choice to hold short-term bond with certain coupon rate.
National bond futures sees better performance
National bond futures market opened at a high level and soared yesterday. The 10-year main contract T1803 rebounded after opening higher at morning session and then kept fluctuating up. It ended at 92.655 yuan, up by 0.175 yuan or 0.19 percent, enjoying the first rise since 2018.
However, interbank bond market saw flat trading on January 8. Yield fluctuated at a narrow range and fell slightly. Yield of the 10-year active national bond 1700025 plunged from 3.93 percent to 3.91 percent, down by 0.5 basis points from previous trading day. Yield of 10-year active bond 170215 issued by China Development Bank lingered around 4.92 percent and closed at 4.93 percent, up by 2 basis points. Yield of sub-new bond 170210 settled at 5.01 percent, keeping flat with that of previous trading day. Traders disclosed that cash bond market sees sluggish trading now, yield doesn’t see huge fluctuation, and short-term bonds still play an important role in trading.
Thanks to the eased capital supply since the start of this year, yield of short-term bond dropped, but that of medium and long-term bond climbed slightly. Yield of national bond futures slumped significantly at the first trading day of this year. But it dropped at a slower pace afterwards and didn’t rebound until early this week, with its performance a little better than cash bond market.
Yield of long-term bond hard to drop
Improvement in liquidity at the beginning of this year backed up the bond market to some extent. As influence of various assessments at the end of last year diminished, market liquidity got relaxed, interest rate of short-term currencies decreased drastically at the beginning of 2018. Although the central bank has suspended open market operation for over 10 consecutive trading days and capitals were withdrawn from the market as reverse repos expired, capital supply is still loose.
The market may be rosy about asset allocation at early this year. According to Industrial Securities, the market seemed to anticipate the trend at the beginning of this year based on custody data of December 2017. The institution viewed that there seems to have certain logic foundation of allocation in January. On the one hand, there’s generally few net supply of rate bond at the beginning of a year. On the other hand, banks, insurers and other institutions may be more willing to have allocation due to sufficient capitals at early year. Therefore, both supply and demand support the market trend.
But Industrial Securities also stated that banks’ intentional for allocation are also affected by financing demand of real economy and liquidity. Bond market suffered headwind this year, so there’s limited space and foundation for yield of long-term bond to decline.
Supervision in financial field is increasingly tough latterly. Trend of supervision policy is still a focus that the market will pay attention to. The market is either absorbing the policies which have been implemented or waiting for implementation of new policies.
Some analysts said that excessive financial liberalization has ended, and even moved in the opposite direction. Fields with over innovation and development in the past will be focus of regulations. The interbank business and wealth management business will be hit. The logic that points to create the bullish run in the bond market has been reversed. Bond demands will face continuous adjustment. There is no ground for a substantial downturn of the rate of return in the bond market.
Fortunately, when the yield on the bond market was already high, there has been some reaction to all kinds of potential negatives. Along with the fact that the money supply was still ample and the bond supply was limited at the beginning of the year, the marginal impact brought by the negatives may be weakened. However, many institutes still said that the loose capital supply may not sustain. The supply of bonds will still be substantial in 2018. The economic growth is still resilient. Policies will continue to maintain its strength. The long-term bond rate can hardly go down. It will be a good strategy to hold short-term bond with certain coupon rate.
Translated by Coral Zhong & Vanessa Chen
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