Event overview
Affected by the continuous upward trend of US bond interest rates, the interest rate of China US 10-year Treasury bonds is approaching and will hang upside down.
Core view
The direct driving factor of China US long-term interest rate inversion is the differentiation of China US monetary policy, and the basic factor is the difference and dislocation of Fundamentals (growth and inflation).
After the great crisis, the interest rate of China US 10-year Treasury bonds was upside down from December 20, 2009 to June 10, 2010, with the maximum upside down of 50bp (April 5, 2010). In the last round of US interest rate increase + table contraction cycle, affected by China's loose monetary policy, the interest rate spread of China US 10-year Treasury bonds narrowed significantly three times (2015,6-2016,1; 2016,8-201612; 2017122019,3).
The upside down period of interest rates between China and the United States may be the second and third quarters of 2022, which is expected to change after the fourth quarter. Logic:
1) the United States: under full employment, in order to fight inflation, the Federal Reserve will raise interest rates continuously in the second and third quarters, and start to shrink the table in May. The interest rate of 10-year US Treasury bonds will continue to rise and may rise to more than 3%; After the third quarter, the inhibitory effect of interest rate hike on the economy will appear, especially in interest rate sensitive areas (real estate and durable consumer goods), the US economy will slow down, inflation is expected to fall significantly, the expectation and pace of interest rate hike will slow down, and guide the long-term interest rate downward.
2) China: in the first half of the year, steady growth was urgent, monetary policy remained loose, and China's 10-year Treasury bond interest rate will remain relatively low (expected to be 2.7% - 2.9%); In the second half of the year, with the weakening of macroeconomic disturbance factors, the effect of the early steady growth policy appeared, the signs of economic stabilization became more obvious, and the long-term interest rate is expected to rise slightly.
The maximum range of interest rate inversion between China and the United States may be about 40bp.
Historical review: the RMB exchange rate and capital flow under the upside down or narrowing of interest rates between China and the United States, 200912,202010,6,10, although the interest rates between China and the United States are upside down, there is still a "double surplus", the capital continues to flow in, and the exchange rate is fixed under policy intervention. In the process of narrowing the interest rate gap between China and the United States from June 2015 to March 2019, the exchange rate depreciated and the degree of capital outflow weakened step by step.
The impact of this round of China US interest rate inversion: the exchange rate is expected to depreciate, the capital outflow is controllable, and the monetary policy is still independent. Logic:
1) in the past two years, with good exports and weak reserve consumption, the foreign exchange reserves of the financial system have increased significantly (nearly trillion US dollars) and the buffer is relatively thick;
2) after experiencing significant fluctuations in the exchange rate market after June 2015, the policy level improved the capital flow management system and expected guidance mechanism;
3) since the beginning of 2022, the Fed's "interest rate increase + table reduction" has been clearly expected by the market, and the US dollar index has also been clearly reflected. The subsequent impact on the RMB exchange rate is significantly higher than expected, and the probability is small;
4) the flexible fluctuation of exchange rate will provide independent space for China's interest rate policy.
