On April 11, the interest rate spread between China and the United States on 10-year Treasury bonds was upside down, the first time since 2010. The yield of us 10-year Treasury bonds rose 5.5bp to 2.764%, and the yield of China’s 10-year Treasury bond 220003 was flat. The valuation of Japanese and Chinese bonds was reported at 2.7525%.
This has also become an important factor affecting the trend of A-Shares and Hong Kong stocks. In early trading today, the three major A-share indexes collectively opened low. The gem once hit a new low since July 2020, with a closing decline of 4.20%, the Shanghai index down 2.61% and the Shenzhen composite index down 3.67%. In addition, the Kechuang 50 index fell below 1000 basis points in the session, which was the first time that the index fell below this point after its release. As of press time, the Hang Seng Index also fell nearly 3%, and the Hang Seng technology index fell more than 5%.
What signal does this round of upside down release? How to view the main reason behind upside down? How to affect the stock exchange bond market? Focusing on the causes, effects and future market research and judgment, many analysts interpreted it for the first time.
From various perspectives, the current round of China US interest rate spread upside down was expected. The direct trigger was the rapid interest rate increase and contraction of the Federal Reserve to promote monetary normalization, which led to the rapid rise of US bond interest rates of various maturities. The fundamental reason was the dislocation of the economic and policy cycles of the two countries in the process of epidemic recovery.
Although the upside down of interest rate spread between China and the United States may increase the pressure on RMB devaluation, affect the independence of monetary policy, and reduce the attraction of RMB assets to overseas institutions and institutions, many analysts are still relatively optimistic. On the one hand, the narrowing or even upside down of nominal interest rate spread does not become the main factor affecting capital flow; On the other hand, the RMB exchange rate has shown strong resilience under the support of trade surplus, risk aversion and low inflation, and the prudent monetary policy will remain “self dominated”.
For a shares, the upside down of China US interest rate spread does not mean that the market will face a sharp correction again. Although facing the dual pressure of fundamentals and liquidity at the same time, many analysts mentioned that at present, A-Shares have entered the bottom grinding period, and can patiently wait for the fundamentals to bottom, the external environment to improve or the policy to be strongly relaxed. After a clearer signal of fundamentals repair appears, there will be a better opportunity.
The bond market is also under pressure in the short term. The narrowing of the interest rate gap between China and the United States will lead to the outflow of funds from China’s bond market, which will have an impact on China’s bond market. However, analysts also mentioned that China’s bond market is still mainly determined by China’s economic policies and is less affected in the short term. In addition, from the perspective of experience, after the upside down of China US interest rate spread (approaching), China’s debt can still go bull in stages.
2002 has seen 4 upside down
Generally speaking, the yield of 10-year Treasury bonds mainly reflects the changes of a country’s economic fundamentals, monetary policy and inflation expectations. China US interest rate spread inversion has occurred four times since 2002. Taking history as a mirror, the divergence of China US monetary policy is usually the main driver of China US interest rate spread inversion.
Chen Guo, chief analyst of China Securities Co.Ltd(601066) securities strategy, believes that the direct trigger is the rapid interest rate increase and reduction of the Federal Reserve to promote monetary normalization, which leads to the rapid rise of US bond interest rates of various maturities. The fundamental reason is the dislocation of economic and policy cycles of the two countries in the process of epidemic recovery. This is also the general view of seller analysts.
Sealand Securities Co.Ltd(000750) strategy Hu guopeng’s team also believes that the direct trigger for the narrowing or even upside down of the interest rate gap between China and the United States in each period of this round is the rapid rise of US bond interest rate under the accelerated tightening of the Federal Reserve, but the fundamental reason is also the dislocation of the economic cycle and the reverse of the policy cycle of the two countries after the epidemic. Although the current stage of the steepest upward slope of US bond interest rate is probably over, there is still a certain upward inertia in the follow-up, with the maximum threshold of 3%. The upside down of China US interest rate spread with more terms is a deterministic event.
Boc International (China) Co.Ltd(601696) global chief economist Guan Tao said that the United States is experiencing high inflation once in 40 years, and the current moderate inflation level in China is an important background for the re dislocation of monetary policies between China and the United States. Given that the focus of US monetary policy is “anti inflation”, China’s monetary policy is focusing on “stable growth”, which is the main reason for the further narrowing of the interest rate gap between China and the United States.
Guotai Junan Securities Co.Ltd(601211) fixed income chief Qin Han believes that the upside down of interest rate difference between China and the United States is faster than expected. As early as February this year, Qin Han’s team proposed that under the background of the people’s Bank of China’s heavy “stagnation” and the Federal Reserve’s heavy “inflation”, the limit of deviation from the differentiation of China US monetary policy may be greater than expected. The 10-year China US interest rate difference may hang upside down within the year. There is no need to be too cautious about the wide currency due to the narrowing of China US interest rate difference.
Orient Securities Company Limited(600958) wealth Research Center Director Chen Dafei said that the upside down is mainly reflected in the difference between China and the United States monetary policy and economic cycle. The main reasons for the rise of 10-year interest rate of US bonds are inflation expectations and the contraction of the Federal Reserve. Under the constraint of 5.5% GDP growth throughout the year, China’s monetary policy stance is opposite to that of the United States (Overseas) – tight outside and loose inside, so the upside down occurs.
how does it affect capital? Facing short-term outflow
Previously, many views believed that the narrowing or even upside down of the interest rate gap between China and the United States may lead to increased pressure on RMB devaluation, which will affect the independence of monetary policy and reduce the attraction of RMB assets to overseas institutions and institutions.
Shao Yu, chief economist of Orient Securities Company Limited(600958) China US interest rate spread upside down, believes that, normally, upside down will bring some pressure. Because global capital flows are arbitrage driven, that is, capital invests in emerging markets by borrowing cheap currencies and interest rates from developed economies. If the interest rate reverses, it means that this carry interest structure has been completely reversed, which will lead to the outflow of funds from emerging markets and put some pressure on the economy and capital markets of emerging markets.
China Securities Co.Ltd(601066) strategy chief Chen Guo also believes that the upside down of China US interest rate spread may bring some constraints to China’s monetary policy operation space, and the capital side may also face the pressure of short-term outflow.
Zheng Jiawei, chief of Shanghai Securities fixed income, believes that this has a great impact on Chinese investor sentiment and the pricing of financial products. The Fed’s interest rate hike to the central rate of 50.2% in May 2023, which means that the interest rate of the Federal Reserve and the central rate of the federal fund will rise to 50.2% in May 2023, which may also have an impact on the central rate of interest of the two countries.
Referring to the current restriction on China’s liquidity environment caused by the narrowing of interest rate gap between China and the United States, Sealand Securities Co.Ltd(000750) strategy Hu guopeng’s team believes that it is mainly reflected in two aspects: one is that the operation space of price instruments will face multiple constraints; the other is the decline in the attractiveness of RMB denominated assets and the continuous amplification of the pressure on the net outflow of cross-border capital. Subsequent quantitative instruments will become an important starting point for leading structural easing. It is necessary to maintain a reasonable abundance of liquidity through RRR reduction and MLF excess continuation, while the return of large-scale net inflow of foreign capital needs to see the peak decline of US bond interest rates.
how does it affect the exchange rate? The impact on RMB is relatively limited, and the monetary policy remains “self dominated”
Despite the short-term pressure, many analysts are optimistic that the narrowing or even upside down of nominal interest rate spread will not become the main factor affecting capital flow. The RMB exchange rate has shown strong resilience under the support of trade surplus, risk aversion and low inflation, and the prudent monetary policy will remain “self dominated”.
Citic Securities Company Limited(600030) chief ficc analyst Mingming pointed out that historically, the narrowing of the interest rate gap between China and the United States is often accompanied by the depreciation of the RMB, but it is not the key factor leading the RMB exchange rate. Analyzing the influencing factors of the RMB exchange rate should start from the perspective of balance of payments. At the current time point, the surplus of current account and direct investment projects is still large, the liquidity of domestic US dollars is sufficient, and the scale of capital outflow is still controllable. Therefore, the narrowing of interest rate spread between China and the United States may have a limited impact on the RMB.
China International Capital Corporation Limited(601995) macro team is also relatively optimistic. It believes that although the interest rate gap between China and the United States has narrowed, the RMB exchange rate has shown strong resilience under the support of trade surplus, risk aversion and low inflation. In the context of the sharp narrowing of the interest rate gap between China and the United States, the policy will still “focus on me”, but the way may be adjusted. The national standing committee will emphasize easing fiscal overweight, and the central bank will emphasize increasing quasi fiscal and easing monetary transmission. The stability of bill interest rate may indicate the acceleration of infrastructure loan delivery. The “fiscal easing” and “credit stabilization” will help to share the pressure of “loosening the currency”.
China Securities Co.Ltd(601066) strategy chief Chen Guo also said that the prudent monetary policy still remains “self-centered”. Even if price instruments face certain constraints, quantitative instruments and other precise structural instruments can be brought into full play. In order to ensure the smooth realization of the annual target of 5.5%, we need to continue to make full, accurate and forward efforts in monetary policy, so as to provide a loose monetary environment for the introduction of other policies.
Yang Chang, head of the policy theme group and chief analyst of Zhongtai Securities Co.Ltd(600918) Research Institute, believes that narrowing or even upside down of nominal interest rate spread does not become the main factor affecting capital flow. The inflation expectation contained in the upward yield of US Treasury bonds is still relatively strong. Whether through the real interest rate difference after CPI or PPI reduction, the real interest rate difference between China and the United States is still expanding. Inflation expectation determines the nominal interest rate difference between China and the United States, and endogenous power determines the actual interest rate difference between China and the United States. It can be expected that with the gradual control of the epidemic, corresponding policies and measures such as real estate, infrastructure and consumption are still expected to promote the stable and upward operation of China’s economy.
Qin Han, chief of Guojun solid income, also suggested that this round of RMB appreciation is against a basket of currencies, and the CFETS RMB exchange rate index has reached a record high since 2015. The historical law shows that the US dollar index will generally peak within two months before and after the first interest rate hike. Even if the interest rate gap between China and the United States narrows and the US dollar index further strengthens, the space for RMB exchange rate adjustment may be relatively limited.
how does it affect a shares? Spread upside down does not mean a sharp correction
As for the impact of a shares, Shenwan Hongyuan Group Co.Ltd(000166) said that when the interest rate spread between China and the United States is narrowed due to the mismatch between China and the United States, the A-share and Hong Kong stock markets are often under pressure. The A-share market is facing the dual pressure of fundamentals and liquidity, and the overall market trend is under pressure; The decline of Hong Kong stock market, which is more direct due to the tightening of US dollar liquidity, is often greater than that of a shares; The US stock market tends to rise under the background of good economic demand in the United States.
However, in terms of its influence, the systematic position reduction of domestic capital itself at this stage may be a more important reason for the decline. Especially from the perspective of land stock connect, during the period of narrowing the interest rate gap between China and the United States after 2015, the overall trend of foreign capital inflow is still showing. In the second quarter, the overall shock bottomed out, and the structure temporarily avoided the direction of relatively crowded allocation of foreign capital and public funds. In the second half of the year, with the emergence of the inflection point of China US interest rate difference (or the last decline of US stocks after the hawkish interest rate increase of the Federal Reserve), the market may gradually get out of the downturn pattern.
China Securities Co.Ltd(601066) strategy chief Chen Guo also pointed out that the current market is in the bottom grinding period from the medium-term perspective, patiently waiting for the fundamentals to bottom, the external environment to improve or the policy to be strongly relaxed, and there will be better opportunities after a clearer signal of fundamentals repair appears.
Sealand Securities Co.Ltd(000750) strategy Hu guopeng’s team thinks the same. He believes that the current A-share is in the bottom grinding period, and the upside down of interest rate difference between China and the United States does not mean that the market will face a sharp correction again. It is suggested to pay attention to three clues of structural opportunities: first, the stable growth sector with the least resistance under the influence of the epidemic, including real estate and infrastructure with strong expectation of policy marginal relaxation, as well as banks benefiting from the stabilization of the real estate chain; Second, post cyclical varieties that lag behind economic cycle changes and can reflect inflation, including coal, petroleum and petrochemical, agriculture, forestry, animal husbandry and fishery, etc; Third, the undervalued growth sector with sufficient early adjustment and current cost performance has begun to appear, including medicine and biology.
Western Securities Co.Ltd(002673) macro chief Zhang Jingjing believes that A-Shares and a bonds have certain rules in previous upside down periods. In terms of 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.
how does it affect the bond market? The bond market is expected to be bullish in stages
In terms of Chinese bonds, the macro team of Debang Securities believes that China’s bond market is less affected in the short term, but the potential pressure in the second to third quarters of this year is still large. In recent years, the impact of US bond interest rate or China US interest rate spread on China’s interest rate has been significantly weakened. Under the background that the epidemic has not improved and the expectation of policy easing is still strong, the logic of how short and long short China’s bond market remains unchanged. Although the short-term interest rate downward space is also limited, and the overall interest rate level is also low, it is not yet time to retreat. We can wait until the favorable factors are landing or the expected warming of economic improvement, and then consider the duration reduction period.
In addition, we can focus on floating rate bonds and Sino US interest rate spread trading opportunities. From the perspective of floating rate debt, China’s floating rate debt implies that there may be 15bp interest rate reduction space in the short term, which is optimistic. At the same time, it also shows that the relative price of floating rate debt has returned to the cheap period; The United States is in the cycle of raising interest rates, and its floating rate bonds are also worth investing. Considering that the current downward speed and range of China US interest rate difference are indeed too fast, and although the China US interest rate difference will hang upside down, the overall interest rate difference level is indeed low. For investors with tools, it is also a high odds investment strategy to try to widen the interest rate spread in stages.
Western Securities Co.Ltd(002673) macro chief Zhang Jingjing’s view is that in the three months before and after the first upside down of the interest rate spread between China and the United States, a-bonds 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.
Yang yewei of Guosheng Securities believes that the narrowing of the interest rate gap between China and the United States will lead to the outflow of funds from China’s bond market, which will have an impact on China’s bond market. The speed of foreign capital flowing into China’s bond market is highly correlated with the interest rate gap between China and the United States. As the interest rate gap between China and the United States narrowed, foreign capital flowed out of China’s bond market rapidly. It is expected that with the further narrowing of the interest rate gap between China and the United States, foreign investors may further reduce their holdings of Chinese bonds in April.
However, Yang yewei also stressed that China’s bond market is still mainly determined by China’s economic policies. At present, under the impact of the epidemic and the economic downturn exceeding expectations, the financing demand shrinks significantly. Not only the financing demand of residents and private enterprises is sluggish, but also the financing demand of the government has slowed down. While the financing demand is sluggish, under the downward pressure of the economy, the central bank will continue to maintain loose monetary policy, and it is possible to further cut interest rates and reserve requirements. Therefore, the interest rate is still in the downward channel. It is expected that the 10-year Treasury bond is expected to reach or even exceed the low point of 2.65% in January. It is suggested to make long-term interest rate bonds.
