The overnight interest rate approached 3%, and the central bank returned 100 billion yuan of funds.
In the pre Festival stall where the Central Bank continues to collect large amount of net funds, the market funds are even tighter. On January 27, the weighted average interest rates of overnight repo (gr001) and 7-day repo (gr007) of interbank deposit financial institutions continued to rise, approaching 3%. The overnight interest rate once exceeded 3%, reaching the highest level in six years since 2015. The “upside down” trend of gc001 and gc007 interest rates of reverse repo varieties of exchange treasury bonds continued to expand, with gc001 interest rate rising above 5%.
Today’s tightening of funds is not only affected by the market demand for funds before the festival, but also driven by the central bank’s liquidity supply contraction. On January 27, the central bank announced that fiscal expenditure increased sharply near the end of the month, and carried out 180 billion yuan of seven day reverse repurchase operation. As 280 billion yuan of seven day reverse repurchase expired on that day, it realized a net return of 100 billion yuan of liquidity.
This is the central bank’s net withdrawal of funds for three consecutive days this week, with the total amount of net withdrawal funds reaching 418.5 billion yuan. Tight funds, as well as the central bank’s less than expected liquidity investment, make the bond market continue to fall. However, many analysts believe that monetary policy will not turn too fast, and there will be no systematic tightening. The current reduction of liquidity investment is to stabilize the rapid upward leverage of the bond market in the early stage, and the follow-up market may usher in the warmth across the Spring Festival. The central bank is expected to increase liquidity investment to escort the capital demand across the Spring Festival.
The rise of leverage in the bond market led the central bank to tighten short-term liquidity investment
The market’s feeling on the tightening of the central bank’s short-term liquidity supply only began last week. During the period from the exposure of individual credit default events in the bond market at the end of last year to the beginning of this year, in order to stabilize the market expectation, the market ushered in a small week of continuous easing of capital.
Looking back on the operation of the just concluded round of small easing cycle, the central bank temporarily launched 200 billion MLF on November 30, and continued to do 950 billion MLF in December, and restarted 14 day reverse repurchase to protect the cross-year capital. Under the care of the central bank, the capital side will maintain a relatively loose trend from December 2020 to early January 2021, and the overnight interest rate will continue to drop below 1%.
But why did this round of easing end in early January, when the market ushered in the large net return of funds from the central bank for several consecutive days?
Liu Deng, investment manager of the financial management department of BOCOM’s financial management special account, told the securities times and China securities company that the fund side was relatively loose some time ago. The overnight repo rate once continued at 1%, and the bull market of stocks and bonds lasted for nearly a month. Such loose fund side led to the transaction amount of inter-bank mortgage repo once climbing to around 4 trillion yuan, indicating that the leverage ratio of the bond market has increased; In addition to the recent sharp rise in the “core assets” of the stock market and the house prices of the first tier cities, the central bank has made a lot of small operations of “5 billion yuan” and “2 billion yuan” in the open market, which is the main reason for the central bank’s recent marginal tightening of liquidity investment in the open market.
Wang Yifeng, chief banking analyst of Everbright Securities, also told China Securities Times and securities dealers that under the loose capital environment, the market is more optimistic about the future liquidity expectation, and is more inclined to increase the yield by allocating short-term debt and leverage, which stimulates the leverage behavior in the bond market, resulting in faster downward speed of short-term debt interest rate and steeper yield curve. It can be seen that in the first ten days of January 2021, the daily transaction scale of overnight pledge repo (R001) in the whole inter-bank market continued to rise, with an average daily scale of 4.22 trillion yuan, significantly higher than the average level of 3.11 trillion yuan in the fourth quarter of 2020, indicating that institutions are more willing to allocate bonds through leverage.
Financial asset bubbles attract further attention
In addition to the rapid rise of leverage ratio in the bond market, Wang Yifeng believes that the sharp fluctuation of asset prices is also the main reason for the central bank’s focus. At the beginning of the year, the new development fund was hot, the real estate prices in some areas rose rapidly, the funds silted up in the field of virtual economy, and the asset price risk increased.
In January 25th, Ma Jun, a member of the monetary policy committee of the central bank, put forward the “stock market and some regional real estate market bubbles have emerged, and the monetary policy should be moderately shifted”, which triggered the market’s concern about the shift of monetary policy. The stock debt of the following day has been adjusted to a certain extent. But in fact, many analysts say that Ma Jun’s view is personal, not a signal that monetary policy is about to “turn” in an all-round way, but rather a reminder of asset price risk.
Interestingly, the market only paid attention to Ma Jun’s statement that “monetary policy should be moderately changed”, but ignored his suggestion that monetary policy should not be changed too fast, and thought that it was reasonable to control the growth rate of broad money (M2) at around 9% this year. Since last year’s base has been very high, it is not a small number for M2 to increase by 8% ~ 9% on this basis.
What kind of expectation does the upside down interest rate reflect?
Although in recent days, the market generally feels that the funds are tight, but the expectation for follow-up funds is still relatively optimistic. This is reflected in the overnight interest rate approaching the 7-day interest rate, and even the “upside down” capital price trend.
Before the press release, the overnight Shibor rate on January 27 was 2.97%, the 7-day Shibor rate was 2.969%, the gc001 rate was 3.955%, and the gc007 rate was 3.785%.
“When funds are tight, overnight and 7-day weighted interest rates will be similar, or even more than 7-day weighted interest rates.” Liu Deng said, on the one hand, overnight is the main transaction varieties. Take January 26, 2021 as an example, the overnight trading volume between banks is about 2.53 trillion yuan, while the 7-day varieties are less than 0.50 trillion yuan. Overnight trading volume has always been the main trading volume. When the capital is tight, the overnight interest rate with greater demand is easy to fluctuate. On the other hand, it also shows that the market does not expect the interest rate of funds to continue to rise, so it gives priority to overnight fund transfer.
Liu Deng said that today (January 27) morning funds interest rate is still high, but near noon funds eased. It is expected that the overall capital level will fluctuate before the Spring Festival, because the general capital level will be disturbed before the Spring Festival or at the end of the quarter. Especially in this year’s Spring Festival, many residents choose to “celebrate the Spring Festival on the spot”, which will bring some uncertainty to the cash withdrawal before the Spring Festival. However, with the central bank’s subsequent liquidity arrangements for the Spring Festival, the capital level is expected to ease, and there is no reason for the fund interest rate to continue to rise sharply.
On January 27, the reverse repo rate of exchange bonds fell at the end of the day, with gc001 falling to 3.925%, reaching a peak of 5.9%.
No need to be too pessimistic about central bank’s short-term liquidity investment
Looking forward to the subsequent central bank liquidity investment, many analysts believe that the market disorder is too pessimistic.
Wang Yifeng believes that there is no need for the market to worry too much about the continued tightening of capital. As the epidemic prevention and control becomes stricter this year, the reduction of the flow of residents returning to their hometown will lead to a drop in cash demand, which is good for the capital before the Spring Festival. Yi Gang, the governor of the people’s Bank of China, has clearly released the policy signal that “we will not withdraw from supporting policies too early”, which may bring warmth to the follow-up market across the Spring Festival.
“Just as last week’s response to the impact of tax factors, the central bank increased its liquidity investment. As the Spring Festival approaches, it is expected that the central bank will make arrangements for liquidity. According to the current market situation, it is expected that the investment in the open market will still be the main one. ” Liu Deng said.
Mingming, deputy director of CITIC Securities Research Institute, said that from historical experience and logic, if the central bank comprehensively tightens monetary policy, stock and real estate prices will be under pressure, and bonds will not be spared. However, judging from the many signals released by the central bank recently, it is relatively certain that monetary policy will continue to support the real economy and ensure the stability and consistency of the policy without a sharp turn, and the probability of comprehensive tightening is small. In the short term, there is no need to worry too much about the change of monetary policy. With reference to the performance of funds before and after the Spring Festival in previous years and the influence of advocating the Spring Festival to celebrate the Spring Festival on the spot this year, we need to pay attention to the expected difference between the follow-up operation of the central bank and the actual feeling of funds.