Event: on the morning of April 11, the yield of U.S. 10-year Treasury bonds rose by 5.5bp to 2.76%, while the yield of China's 10-year Treasury bonds was flat at 2.75%. The interest rate spread of China US 10-year Treasury bonds was upside down for the first time since 2010.
In this regard, Dongfang Jincheng interprets as follows:
The direct reason for the upside down of the interest rate gap between China and the United States is that the US bond interest rate soared again under the catalysis of the expectation of accelerated policy tightening. The fundamental reason lies in the differentiation between the pace of economic recovery and monetary policy between China and the United States after the epidemic.
Since April, US bond interest rates have accelerated upward. In particular, the Federal Reserve strengthened the possibility of adding 50 basis points one or more times in the future in the minutes of the March monetary policy meeting released last Thursday (April 7); More importantly, the minutes of this meeting also basically defined the table reduction path that the market is more concerned about, which is obviously more hawkish than the previous market expectation: that is, the table reduction will be started as early as may, and the scale of the table reduction will be increased to the upper limit of us $95 billion per month in three months or more - compared with the last round of table reduction in 201719, the reduction will be increased to US $50 billion per month in 15 months, The scale of the upper limit of this round of table reduction has almost doubled, and the speed is significantly faster than that of the previous round. Even the "big Dove" who has long been regarded as a supporter of loose and low interest rate policy and fed vice chairman brennard made it clear in his speech last week that "the Fed needs to act quickly to control the persistently high inflation rate". Brennard's statement turned eagle, which further highlighted the urgency of the Federal Reserve to tighten monetary policy in the first half of the year. As a result, the minutes of the meeting and the hawkish tightening signals released by major Fed officials, combined with the strong non farm employment data in March released at the beginning of the month, further heated the market's expectation of accelerated tightening of monetary policy, thus pushing up the 10-year US bond interest rate and constantly breaking through the high level: from the interest rate increase expectation implied in the latest federal fund interest rate futures, the market believes that at the interest rate meeting in May and June, The probability of interest rate hikes totaling at least 4.50% will rise to at least 4.50%.
But in fact, we also believe that since the outbreak, there have been great differences between China and the United States in terms of economic repair rhythm and inflation trend, resulting in the differentiation of monetary policies between the two countries, that is, the so-called "internal loosening and external tightening". In this context, the interest rate gap between China and the United States continues to narrow and even upside down, which is an inevitable trend to a certain extent.
From the follow-up trend, we believe that this round of China US interest rate spread upside down may be a medium-term and short-term phenomenon, which is not sustainable, and it is expected to "return to positive" in the second half of the year.
In the next 1-2 months, in terms of US bonds, there may still be some "inertia" in the market's continued digestion of the Fed's expectation of raising interest rates and shrinking the table. Superimposed on the US CPI data in March and April, the probability rate will remain high, and inflation expectations may continue to push up the interest rate of long-end US bonds; In terms of China's debt, considering the recent sharp rebound of China's epidemic and the fact that real estate is still in the downward process, China's economy will still face great downward pressure in the short term, especially in the second quarter. The promotion of credit relief still needs the "escort" of money relief. The central bank is more likely to further reduce reserve requirements and interest rates, and there is still some downward space for China's debt interest rate. Therefore, there is still the possibility of further upside down of China US interest rate spread in the next 1-2 months. However, looking back, with the landing of the boots of raising interest rates and shrinking the table and the emergence of downward pressure on the economy, the 10-year US bond interest rate may enter the downward cycle at the end of the second quarter. At that time, if China's epidemic situation improves, the steady growth policy works and the economy is expected to improve, there is still room for the 10-year medium-term bond interest rate to rise. Therefore, overall, the interest rate spread between China and the United States may continue to hang upside down in the next 1-2 months, but it is expected to "return to positive" in the second half of the year.
The pressure of capital outflow caused by the upside down of interest rate difference between China and the United States is controllable, and the pressure of RMB devaluation is limited. China's monetary policy will still be conditional to "focus on me".
We believe that the capital outflow pressure caused by the upside down of China US interest rate spread is controllable. The recent net outflow of funds from the bond market and stock market is largely due to the general outflow of international capital from emerging markets after the intensification of geopolitical tensions. There is no need to over interpret it from the perspective of narrowing the interest rate gap between China and the United States. This means that the current cross-border capital fluctuations under securities investment are still within the normal and controllable range, and there is no need for policy overreaction. Looking forward to the future, considering that China's economy will maintain a medium and high growth level, the financial market will be further opened to the outside world, and RMB assets are showing a certain risk aversion attribute, after short-term fluctuations, the continuous inflow of overseas securities investment will still be the general direction in the future.
In terms of exchange rate, the depreciation pressure brought by the narrowing of interest rate gap between China and the United States is limited. The data show that since the "811 foreign exchange reform" in 2015, the correlation between the change of China US interest rate spread and the fluctuation of RMB against the US dollar is very low - the correlation coefficient is only 0.1, which is far lower than the statistically significant level. This means that the RMB exchange rate is driven by multiple factors, among which China's export situation and China US relations are more influential. To take a step back, even if the upside down of interest rate difference between China and the United States will form phased depreciation pressure on the exchange rate of RMB against the US dollar, this pressure is relatively limited; When necessary, regulators have sufficient policy tools for regulation, including measures such as restarting counter cyclical adjustment factors and strengthening macro prudential supervision of cross-border capital flows. We judge that as long as the depreciation of the RMB against the US dollar is controlled at about 5% this year, China's monetary policy will have sufficient conditions to "focus on me".
