The rapid narrowing of the interest rate gap between China and the United States has led to a significant net outflow of Chinese bonds held by foreign investors for two consecutive months. The rapid narrowing of interest rate spread between China and the United States basically corresponds to the net outflow of foreign capital from China's bond market. As of April 8, the 2Y China US interest rate spread has been upside down 27bp, and the 10Y China US interest rate spread is only 3bp. From February to March this year, the debt reduction scale of overseas institutions hit a record high, with the net reduction scale of 66.91 billion yuan and 98.16 billion yuan respectively. In February, the reduction of foreign capital's holdings of treasury bonds, government financial bonds and commercial bank bonds was 35.42 billion yuan, 28.53 billion yuan and 1.61 billion yuan respectively. In March, the reduction of foreign capital's holdings of treasury bonds, government financial bonds and commercial bank bonds further expanded to 51.81 billion yuan, 39.68 billion yuan and 4.91 billion yuan.
Whether the upside down of interest rate difference between China and the United States continues? Will foreign capital further reduce its holdings?
1) learn from history: there are three rounds of upside down in the interest rate difference between China and the United States, and the latest round lasted less than one month. Historically, there have been three rounds of upside down in the interest rate difference between China and the United States: Q4 in 2004 to Q1 in 2005, H2 in 2008 to H1 in 2009 and Q4 in 2018. Before the second exchange rate reform on June 19, 2010, China and the United States had poor interest rate linkage and limited cross-border capital flows. From 2005 to 2008, China and the United States had reverse changes in interest rates and basically upside down interest rate spreads, which was less referential. The most recent 2Y China US interest rate spread upside down in 2018 lasted less than one month.
2) what do you think of the persistence of this round of upside down interest rate spread between China and the United States? Or not strong. The reaction of the short-term market to the expected contraction may continue to push up the yield of long-term US bonds, and there is great downward pressure on China's economy in the short term, which does not rule out the possibility of further upside down of the interest rate gap between China and the United States. However, in the future, with the landing of the scale reduction boots, the approach of the mid-term election and the emergence of downward pressure on the economy, the yield of 10-year US bonds may enter the downward cycle from the end of Q2 to the beginning of Q3. At that time, if China's epidemic situation improves and the steady growth policy is put into force, and the economy is better, it is expected that the yield of 10-year medium-term bonds may also rise in the next 10 years. Therefore, the interest rate spread between China and the United States may continue to narrow from April to may, but it is expected to widen later.
3) it can be seen that the current stage is an accelerated period for foreign investors to reduce their holdings of Chinese bonds, but the sustainability may be limited.
In previous upside down periods, A-Shares and a bonds have certain rules.
A shares: three months before and after the first upside down of each round, A-Shares absolutely lost, with significant growth decline and relatively resistant value decline; Once the interest rate spread reaches the minimum of the range, before and after the minimum, A-Shares are among the best in all major categories of assets, but the subsequent market style is related to the direction of economic policy and industrial policy.
A-bond: three months before and after the first upside down of interest rate spread between China and the United States, a-bond showed obvious relative returns in all major categories of assets. There is no significant regularity in the performance of treasury bonds before and after the interest rate spread reaches the range minimum. However, historical experience shows that once the upside down of interest rate spread between China and the United States ends and begins to widen, the pressure of capital outflow in China's bond market will also be relieved. And empirically, after the interest rate spread between China and the United States (approaching) hangs upside down, China's debt can still go bull in stages.
RMB exchange rate: the experience in 2018 shows that the impact of interest rate spread on the exchange rate is not linear. Inflation, market risk aversion and other factors need to be considered when discussing the exchange rate.
Risk tip: China US economic outlook exceeds expectations; China US monetary policy exceeded expectations; Geopolitical risks exceeded expectations.
