Local government bonds to face price-rising wave

Interest rates of eight public offered local government bonds in Yunnan Province were 20 base points higher than the lower limits on Sep. 21, which is not a single case.

Since local government bonds of Liaoning Province failed to call for tenders at the beginning of August, interest rates of local government bonds have obviously risen in August and September along with the constantly increased supply. Based on incomplete statistics by the journalist, at least 15 provinces and cities among 26 provinces and cities, which have issued bonds, raised the bond rates , up by 10 to 30 base points than the lower limits.

The WIND data show that, up to Sep. 21, 626 local government bonds of 2,417,348 million yuan have been accumulatively issued since this year, still with local government bonds of 1.3 trillion yuan to be issued. Market insiders indicated that the issuers and underwriters will intensify their battle along with the constantly released supply, especially the battle between local governments and banks. The marketization factors are likely to play an increasingly important role in the pricing of local government bonds, with ‘price-rising’ as a trend.

At the beginning of August, Liaoning Province issued the local government bonds, arousing the agitation in the market. There was the first local government bond with failure to call for tenders, besides that, 5 bonds issued on that day had the offering interest rates with at least 20 base points higher than the lower limit. However, interest rates of local governments bonds were all close to the lower limit previously.

Interest rates of local government bonds have commonly increased by an obvious range since the beginning of August to Sep. 21. At least 7 provinces and cities increased such bond rates, with 10 to 20 base points higher than the lower limits, including Henan Province, Shaanxi Province, Anhui Province, Tianjin City, Qingdao City, Zhejiang Province and Sinkiang Autonomous Region. And at least 8 provinces and cities increased such bond rates, with 20 to 30 base points higher than the lower limits, including Inner Mongolia, Ningxia Autonomous Region, Guangxi Province, Guizhou Province, Hebei Province, Yunnan Province, Jiangsu Province and Shandong Province. Over half of the provinces and cities have obviously increased their bond interest rates.

Journalist also found that most of provinces and cities increased the bond interest rates by 10 to 15 base points in August. From Sep.8, contract interest rates for local government bonds of all terms in Ningxia and Inner Mongolia are 20 base points higher than the lower limits, which are 10 or 15 base points higher than previous expectations. The interest margin between local government bonds in Jiangsu Province and the lower limits has expanded to about 30 base points on Sep. 10.

Bond-issuing situation of Jiangsu provincial government on Sep. 10 showed that contract interest rates of Jiangsu bonds of eight terms are higher than the lower limits of tendering interest rate range. Contract interest rate of a specialized bond with a 3-year term is 31 base points higher than its tendering lower limit, with those of other bonds are all 30 base points higher than the lower limits.

According to the results of Shandong Province’s public offering of two batches of local government bonds on Sept. 14, the bond rates with different maturities were 24 to 26 base points than the lower limits. The results of the two batches of local government bonds publicly offered by Guangxi on Sept.15 showed that all their bond rates were 25 base points higher than the lower limit. The four batches of local government bonds issued by Guizhou Province on Sep. 18 also witnessed their bond rates 25 base points higher than the lower limits.

However, various industrial insiders indicated that the rise of local government bond rates was no surprising, and it was an inevitable trend as the supply of swap bonds continues to increase.

Xu Gao, chief economist at Everbright Securities Company Limited (601788.SH), believed that there are 3.2 trillion yuan swap bonds this year and will be more next year. “On the one hand, mature local government bonds, yet still in stock, will have demands for swap in the coming years. On the other hand, even if the stock is removed, local governments still need formal financing channels for infrastructure investment. Actually, local government bond swap program demonstrates the central government’s positive attitude which will remain for a long time.”

In the view of commercial banks, they can never make profit, or might even loss money from purchasing local government bonds which have low yields and liquidity. They subscribe the bonds mainly out of the consideration of keeping good relations with local governments. However, trillions of investment in local government bonds will be a considerable threat to banks’ profits. Therefore, to raise the interest rates of local government bonds is inevitable.