China's bond market will likely hail a bull run in the fourth quarter of this year and the yields of interest rate-linked bonds are expected to maintain a downward trend in October-December, market analysts say. In the fourth quarter, the bond supply pressure may get eased after the interest rate-linked product supply peaked in the third quarter.
China issued overall 2.77 trillion yuan worth of interest rate-linked bonds in the third quarter of this year, up 0.44 trillion yuan from the second quarter of this year, according to data from Wind Info. Statistics show that China issued 868.3 billion yuan worth of local government bonds in the second quarter of this year and 1.57 trillion yuan in the third quarter, accounting for 37 percent of the total newly-issued interest rate-linked products in the second quarter and 57 percent in the third quarter.
Previously, China's Ministry of Finance (MOF) gave local governments 3.2 trillion yuan quota to replace their existing debts with new bonds this year. In addition, new local government bonds worth 600 billion yuan in 2015 were also approved. Hence, the total scale of local government bonds issuance came up to around 3.8 trillion yuan this year. So far, China's local governments have issued over 2.45 trillion yuan worth of bonds this year after local government bond issuance was introduced in May, completing 60 percent of the planned quota for the whole year.
In the coming three months, another 1.35 trillion yuan of local government bonds are to be issued. The sharp increase of local government bond supply will pose a great impact on the interest rate-linked bonds and hence cast negative impacts on the yield of long-term bonds. However, the negative effect caused by heavy bond supply will gradually fade away, as local government bond supply is expected to decrease in the forth quarter of this year.
Haitong Securities points out that though new local government bond offerings will still weigh on the bond market in the future, the adverse effect may be further muted. Besides, due to the volatility of stock market, investors are keen to rush into the bond market, which together with banks' rising allocation demand after the central bank's reserve requirement ratio (RRR) cut in early September and the sharp decline in the yields of off-balance wealth management products, will provide a support to the bond market in the fourth quarter of this year.
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