Benchmark interest rate
The US Treasury's bond issuance has slowed down, the Federal Reserve has once again suspended interest rate hikes, and US bond rates have peaked and fallen
The growth rate of US Treasury bond issuance has slowed down, and the supply of US bonds has eased. According to the quarterly refinancing plan released by the US Treasury Department in early November (November 23 to January 24), the total size of refinanced bonds in this quarter was $776 billion, lower than the estimated $852 billion in early August, indicating a slowdown in the pace of issuance compared to the previous quarter. The planned refinancing scale for the next quarter (February 24 to April 24) is $816 billion.
It is worth noting that according to the report submitted by the U.S. Treasury Department's Borrowing Advisory Committee (TBAC) to Secretary of the Treasury Yellen on October 31, TBAC believes that the recent rapid rise in long-term bond yields is partly due to stronger than expected economic activities and labor market data, and has recognized that the current market dominated by price sensitive investors cannot keep up with the pace of supply growth for U.S. treasury bond bonds, Additional term premium is required for holding long-term treasury bond. In this context, the Ministry of Finance plans to gradually increase the proportion of the issuance of medium - and short-term treasury bond with low interest rate sensitivity, and will increasingly consider the rising debt scale and financing costs in future financing decisions. The slowdown in bond issuance this quarter has had an immediate inhibitory effect on long-term bond yields. The 10-year US Treasury bond interest rate reached 4.576% as of Friday's close, a rapid decline of about 45bp from its high of 5.024% on October 23.
The Federal Reserve has suspended interest rate hikes for the second consecutive time, and non farm data is weaker than expected, reducing the probability of further rate hikes in the future. The Federal Reserve's November FOMC meeting continued to maintain its target interest rate range at 5.25% -5.50%, in line with market expectations. After the meeting, Powell spoke cautiously about the interest rate hike process and did not indicate that it had officially ended, retaining the possibility of future interest rate hikes. However, from the perspective of market expectations, the probability of resuming interest rate hikes in December is expected to decrease to within 20% after the meeting. On November 3rd, US non farm employment data showed that there were 150000 new non farm employees, lower than the market expectation of 180000 and lower than the average monthly growth rate of 258000 in the past 12 months. The unemployment rate rose to 3.9%, and wage growth slowed down month on month. Taking into account the persistently high US bond interest rates and the tightening of the financial environment, we believe that under the benchmark assumption of avoiding a recession by the Federal Reserve, the necessity for further monetary policy tightening is reduced. The current rate hike process is likely to have ended, and the first rate cut may take place in the middle of next year.
From the remaining time of the year, it can be seen that the temporary bearish effect of the recent short covering of US Treasury bonds and the easing of supply factors due to the slowdown in Treasury bond issuance on US bond interest rates has been basically reflected. The impact of the Federal Reserve's suspension of interest rate hikes on short-term interest rates is more obvious. With the issuance scale still relatively high in the next two quarters, it is expected that the 10-year US bond interest rate will continue to fluctuate above 4.5% in the short term, The subsequent trend still mainly depends on changes in the US economic situation. If economic data continues to weaken, US bond interest rates may enter a trend downward window. It is recommended to keep close monitoring.
Non US currencies rebounded and the RMB exchange rate stabilized. In the past two weeks, non US currencies have rebounded to varying degrees, benefiting from the decline in US bond interest rates. Currencies with deeper losses in the early stages, such as the euro, pound, and Australian dollar, have rebounded significantly, while the Japanese yen has rebounded slightly, mainly due to the widening US Japanese interest rate gap and weaker than market expectations from the Bank of Japan's monetary policy adjustment. The RMB exchange rate has remained stable under the influence of the recent rise and then fall in the interest rate difference between China and the United States. In terms of horizontal comparison, the RMB exchange rate has the smallest fluctuation among non US currencies and has remained basically unchanged in the past two weeks. In the short term, with the European Central Bank's interest rate hike process likely to have ended, the Virtue spread is expected to continue to fluctuate at high levels. The more resilient economic situation in the United States compared to the eurozone also supports the US dollar index, and it is expected to continue to fluctuate at high levels above 104 in the short term.
Primary market
Urban investment US dollar bonds newly issued and rebounded
In the past two weeks (October 23-November 3), the prosperity of the primary market has increased compared to two weeks ago, with a total of 20 bonds issued, involving 14 issuers, and a total issuance scale of $3.3 billion. According to the number of issues, the financial industry is the main issuance sector, with 13 issues totaling $1.617 billion. According to the issuance scale, the urban investment sector has issued a total of 7 new bonds totaling $1.677 billion, making it the largest issuance sector. In terms of coupon, Ningguo State owned Capital Holding Group Co., Ltd. in the urban investment sector has a higher issuance coupon rate, reaching 7.9%.
The downward trend in net financing of Chinese dollar bonds is expected to reverse. From the trend of monthly net financing amount, the net financing amount of Chinese dollar bonds in October continued to decline and was in a deep negative value. The peak maturity of Chinese dollar bonds within the year has passed, with maturities of less than $15 billion in November and December. Among them, the urban investment sector had a larger maturity scale of $3.6 billion in November, while the financial and real estate sectors had less pressure to mature within the year. Considering the stimulating effect of the marginal decline in the benchmark interest rate of US Treasuries, it is expected that the new issuance of Chinese US dollar bonds in November will rebound, and with a smaller maturity scale, the net financing amount is expected to rebound from the bottom.
Secondary market
Investment grade US dollar bonds have stabilized and rebounded, but high yields have underperformed due to real estate drag
In terms of yield, the yield of Chinese investment grade US dollar bonds followed the decline of US bond interest rates, and the credit spread with US bonds narrowed slightly by 1 bp. The yield and spread of high yield bonds rebounded. As of November 3rd, the 10-year US Treasury yield has peaked and fallen, a significant drop of 36 basis points compared to two weeks ago. The investment grade yield has also declined by 37 basis points to 6.23%, and the spread has narrowed by 1 basis point to 166 basis points; The yield of high-yield Chinese dollar bonds increased by 55bp to 19.75%, and the spread widened by 91bp to 1518bp.
In terms of return, the secondary market of Chinese dollar bonds has rebounded significantly against the backdrop of a decline in US bond yields, with an overall increase of 1% in the past two weeks. The performance of different sectors is differentiated, with investment grade US dollar bonds following the US bond up 1.1%, while high yield US dollar bonds performed poorly, rising only 0.1% on a biweekly basis. The year-to-date return recorded -19.6%, and the continued rebound of the high yield urban investment sector partially offset the drag on the real estate sector. From an industry perspective, the real estate sector has fallen by 0.4 percentage points in the past two weeks due to negative public opinion from some real estate companies. The year-to-date return has dropped to -35.7%, while the financial sector has risen by 0.5%. The non-financial sector has performed the best, rising 1.6% in the past two weeks. Urban investment has continued its stable performance, with a slight increase of 0.4% in the past two weeks.