Report: Active issuance and trading of government bonds in the first half of the year, with overall downward volatility in bond market yields

According to the financial news app Zhitong Finance, the China Foreign Exchange Trading Center has released the "Report on the Operation of the Interbank RMB Market in the First Half of 2024". In the first half of 2024, the trading volume and balance of the money market decreased, and the phenomenon of fund stratification converged; government bond issuance and trading were active, with overall downward fluctuations in bond market yields and steep yield curves; the interest rate swap curve flattened overall, and the trading volume of RMB derivatives decreased month-on-month. In the first half of the year, the total trading volume of various financial products reached 107.84 trillion yuan, an increase of 3.6% year-on-year and a decrease of 5.6% month-on-month.

I. Decrease in Money Market Trading Volume and Balance, Convergence of Fund Stratification, Decrease in Net Borrowing Balances of Large Commercial Banks, and Money Market Funds Making Up for the Shortfall

(I) Decrease in Money Market Trading Volume Month-on-Month in the First Half of the Year

The total trading volume in the first half of the year in the money market was 84.66 trillion yuan (a decrease of 11% month-on-month), with a daily average trading volume of 6.9 trillion yuan (a decrease of 8% month-on-month). Among them, interbank lending transactions amounted to 5.13 trillion yuan, with a daily average of 416.8 billion yuan (a decrease of 23% month-on-month); pledged repo transactions amounted to 791.6 trillion yuan, with a daily average of 6.4 trillion yuan (a decrease of 7% month-on-month); and outright repo transactions amounted to 3.8 trillion yuan, with a daily average of 308 billion yuan (an increase of 45% month-on-month).

(II) Reserve Requirement Ratio Reductions and Structural Interest Rate Cuts in the First Half of the Year, with Less Clear Fund Stratification

In the first half of the year, the central bank reduced the reserve requirement ratio and implemented structural interest rate cuts. Specifically, on January 24, the central bank announced a 25 basis point cut in the next day's rediscount rate and the interest rate for loans to support agriculture and small businesses, followed by a 50 basis point reserve requirement ratio cut on February 5. In the first half of the year, the central bank injected 2.289 trillion yuan through MLF (Medium-term Lending Facility) operations, with 2.291 trillion yuan maturing, and a net withdrawal of 2.089 trillion yuan through reverse repos. In the first quarter, there was a significant amount of reverse repo injections maturing, and in the second quarter, the central bank increased reverse repo injections at the end of each month to maintain liquidity across months.

Overnight repo rates increased, while 7-day repo rates decreased, weakening the stratification of liquidity. In the first half of the year, the weighted average of DR001 and R001 increased by 11 basis points and 8 basis points to 1.74% and 1.84% respectively; the weighted average of DR007 and R007 decreased by 4 basis points and 22 basis points to 1.89% and 2.06% respectively. In the first half of the year, DR007 ranged from a low of 1.7640% to a high of 2.1664%, with a median of 1.8505%; the fluctuation range was 40 basis points, a decrease of 41 basis points month-on-month. Money market interest rates remained stable, with reasonable and ample liquidity. In January, there was a clear effect from the Spring Festival, with relatively high rates across different tenors; in March and June, rates rose during the quarter and half-year transitions. Since the second quarter, the stratification of market funds has converged, with ample non-bank funds and smooth financing. In the first half of the year, the daily average interest rate spread between R001-DR001 and R007-DR007 was 10 basis points and 16 basis points respectively, a decrease of 5 basis points and 14 basis points month-on-month.

(III) Leverage Ratios at Low Levels, Slight Decrease in Daily Average Balances in the Money Market, Decrease in Net Borrowing Balances of Large Commercial Banks, and Money Market Funds Making Up for the Shortfall

In the first half of the year, the daily average balance in the money market decreased slightly. Due to the compression of leverage arbitrage space, the average leverage ratio in the interbank market in June decreased by 1.54 percentage points to 107.47% compared to December last year. The daily average balance in the money market in the first half of the year was 11.6 trillion yuan, a decrease of 4% month-on-month Among them, the impact of large-scale lending by major banks has decreased significantly. In the first half of the year, the daily average net lending balance of large commercial banks decreased by 11% month-on-month, while money market lending made up for it, with the daily average net lending balance increasing by 5%.

II. Differentiation of Global Monetary Policies, Domestic Economic Data Still Bottoming Out, Active Government Bond Issuance and Trading, Bond Market Yields Overall Volatile Downward, Steep Yield Curve

(1) Differentiation of Global Monetary Policies, Delay in Fed Rate Cuts Expectations, Continued Improvement in Domestic Economy, Strong Exports and Bottoming Out of Domestic Demand

Internationally, there is a differentiation in global monetary policies. The ECB started cutting interest rates in June, while the BOJ raised rates for the first time in March and ended its yield curve control policy. Major economies still face sticky inflation, with market expectations delaying the first Fed rate cut to September and reducing the number of rate cuts to once this year. Domestically, in the first half of the year, external demand supported the economy, with export growth better than expected. However, domestic demand is weak, with investment and consumption growth slowing down. The manufacturing sector remains resilient, infrastructure growth is slowing down, and the effects of real estate policies are yet to be observed. The manufacturing PMI in June was 49.5%, below the boom-bust line for the second consecutive month.

(2) Government Bonds, Credit Bonds, and Financial Bonds Issuance Increased Year-on-Year and Reached a New High for the Same Period, While Other Bond Issuance Decreased Significantly Year-on-Year

In the first half of the year, 11,500 bonds were issued, totaling 21.9 trillion yuan, an increase of 1.2% year-on-year and a decrease of 6.2% month-on-month. Net financing was 5.3 trillion yuan, a year-on-year decrease of 0.7 trillion yuan (-11.6%) and a month-on-month decrease of 1.9 trillion yuan (-26.5%). See Table 1 for details.

Table 1 Primary Issuance and Financing Situation

(3) Active Government Bond Trading, with the Largest Year-on-Year and Month-on-Month Increases

In the first half of the year, 4.31 million transactions of treasury bonds were made, totaling 19.36 trillion yuan, with a daily average transaction of 1.5739 trillion yuan, an increase of 35% year-on-year and 23% month-on-month. Among them, treasury bond transactions were 7.08 trillion yuan, an increase of 183% year-on-year and 61% month-on-month; policy financial bond transactions were 4.95 trillion yuan, a decrease of 11% year-on-year and 6% month-on-month; local government bond transactions were 0.895 trillion yuan, an increase of 63% year-on-year and 23% month-on-month; major credit bond transactions were 1.43 trillion yuan, a decrease of 8% year-on-year and 3% month-on-month; financial bond transactions were 1.06 trillion yuan, an increase of 16.5% year-on-year and 5% month-on-month; interbank certificates of deposit transactions were 3.88 trillion yuan, an increase of 22% year-on-year and 20% month-on-month.

In the first half of the year, bond lending transactions totaled 13.5 thousand, with a total face value of 17.8 trillion yuan, and a daily average transaction of 1.448 trillion yuan, an increase of 49% year-on-year and 17% month-on-month. Central lending transactions were 4, with a total face value of 0.4 billion yuan.

(4) Bond Market Yields Volatile Downward, with 10-year and 30-year treasury yields running in the range of 2.21% to 2.56% and 2.42% to 2.84% respectively, steepening yield curve, and narrowing credit spreads In the first half of the year, the overall yield of the bond market fluctuated downward. From the beginning of the year to early March, the reduction in reserve requirements and interest rates, along with institutional underweight support, strengthened the bond market, with the yields of 10-year and 30-year government bonds breaking below 2.3% and 2.5% respectively. From early March to late April, despite disturbances from expectations of real estate policies and supply of ultra-long bonds, the slow pace of local government bond issuance led to a second round of yield decline after fluctuations. Since late April, the central bank has repeatedly warned of long-term bond risks compounded by the implementation of new real estate policies, resulting in a slight rebound in yields followed by further fluctuations and a subsequent decline.

At the end of the half-year, the yields of 1-year, 3-year, 5-year, 7-year, 10-year, and 30-year government bonds were 1.54%, 1.8%, 1.98%, 2.1%, 2.21%, and 2.43% respectively, representing a decrease of 54, 49, 42, 43, 35, and 40 basis points from the end of the previous year. In the first half of the year, the 10-year government bond curve ranged from a low of 2.2058% to a high of 2.5601%, with a fluctuation range of approximately 35 basis points, an increase of 18 basis points compared to the previous period, and an increase of 4 basis points year-on-year. Credit bond yields saw a significant overall decline, with credit spreads and rating spreads narrowing.

III. Interest Rate Swap Curve Flattening Downward, Decrease in RMB Derivatives Trading Volume

In the first half of the year, influenced by the downward trend in funding rates and cash rates, the interest rate swap curve flattened downward overall. The prices of 6-month, 1-year, and 5-year SHIBOR 3M swaps were 1.9078%, 1.9277%, and 2.0654% respectively, down by 49, 36, and 50 basis points from the end of the previous year. The prices of 1-year, 5-year, and 10-year FR007 swaps were 1.8363%, 1.9638%, and 2.1588% respectively, down by 16, 35, and 35 basis points from the end of the previous year.

The daily trading volume of interest rate swaps decreased. In the first half of the year, a total of 155,000 RMB interest rate swaps were traded, with a daily average decrease of 14.1%; the total nominal principal was 15.4 trillion yuan, with a daily average trading volume of 1248.88 billion yuan, down by 4.5% compared to the previous period.

The daily trading volume of bond forwards and interest rate options decreased. In the first half of the year, 2404 transactions of standard bond forwards were made, with a total nominal principal of 187.81 billion yuan, representing a daily average decrease of 14.1%. RMB interest rate options trading involved 216 transactions with a total nominal principal of 42.78 billion yuan, showing a daily average decrease of 8.9%. Among these, interest rate swap options trading involved 4 transactions with a total nominal principal of 18 billion yuan, while interest rate upper/lower limit options trading involved 212 transactions with a total nominal principal of 409.8 billion yuan