The first round of trillion-yuan ultra-long-term special treasury bonds will deb

The market anticipates that the central bank will create a suitable liquidity environment for government bond issuance through measures such as reserve requirement ratio (RRR) cuts and Medium-term Lending Facility (MLF) operations. In the future, it may also maintain a low-interest-rate environment by cutting interest rates to support the low-cost issuance of government bonds.

The 1 trillion yuan ultra-long-term special treasury bonds, announced in advance at the National Two Sessions, will start to be issued this week.

On May 13th, the Ministry of Finance's official website published the "2024 General Government Bonds and Ultra-Long-Term Special Treasury Bonds Issuance Arrangements," which includes three varieties of ultra-long-term special treasury bonds with 20-year, 30-year, and 50-year maturities, all paying interest semi-annually. According to the arrangement, the 30-year special treasury bonds will be issued first on this Friday (May 17th).

"In theory, the issuance of special treasury bonds will exert an upward push on interest rates, but considering the relatively moderate pace of issuance and the asset scarcity still present in the bond market, we expect the adjustment to be limited and may cause some disturbance to government bond yields at specific issuance points," said Ming Ming, Chief Economist at CITIC Securities.

Looking at market performance, on the 13th, government bond futures showed strength throughout the day. By the close, the main contracts for 30-year, 10-year, and 5-year terms rose by 0.68%, 0.18%, and 0.13%, respectively.

"Today's rise is mainly due to the market being in a recovery state after the adjustment at the end of April," said Yuan Qi, a private investment manager from Shanghai, "In the medium to long term, we still see investment value in government bonds."

With the start of the issuance of ultra-long-term special treasury bonds, the demand for medium to long-term liquidity in the banking system will correspondingly increase. Several analysts have indicated that it is expected that the People's Bank of China (hereinafter referred to as "the central bank") will create a suitable liquidity environment for government bond issuance through measures such as RRR cuts and MLF operations, and may also maintain a low-interest-rate environment in the future by cutting interest rates to support the low-cost issuance of government bonds.

Regarding the specific timing of operations, Ming Ming stated that it is anticipated that the central bank may first provide liquidity support through RRR cuts in the second and third quarters. After the exchange rate pressure eases, it may then maintain a low-interest-rate environment through interest rate cuts, helping government bonds to be issued at a lower cost.

The market expects a higher probability of an RRR cut than an interest rate cut.The 2024 National Two Sessions government work report proposed that "to systematically address the funding issues of some major projects in the process of building a strong country and national rejuvenation, it is planned to issue super long-term special government bonds for several consecutive years starting this year, specifically for the implementation of national major strategies and the construction of security capabilities in key areas. This year, a preliminary issue of 1 trillion yuan is planned."

The specific issuance arrangements show that this year, 7 twenty-year super long-term special government bonds will be issued, including 2 initial issues and 5 follow-up issues, with the earliest issuance date on May 24th; 12 thirty-year super long-term special government bonds will be issued, including 3 initial issues and 9 follow-up issues, with the earliest issuance date on May 17th; it is planned to issue 3 fifty-year super long-term special government bonds, including 1 initial issue and 2 follow-up issues, with the earliest issuance date on June 14th.

At the same time, information from multiple sources indicates that the issuance of local government bonds in May will also accelerate. With the issuance of local and national government bonds, the demand for medium to long-term liquidity in the banking system will increase, and how monetary policy will support government bond issuance has become a focus of market attention.

Lin Yingqi, a banking industry analyst at CICC, said that with the efforts of local government bonds and special government bonds, monetary policy tools such as reserve requirement ratio (RRR) cuts and secondary market purchases of government bonds are worth looking forward to.

"We believe that the central bank may use tools such as OMO (open market operations), MLF (medium-term lending facility), and reserve requirements to maintain a reasonable abundance of liquidity in the banking system, creating a suitable liquidity environment for government bond issuance," said Zhang Xu, Chief Fixed Income Analyst at Everbright Securities. "Benefiting from measures such as the prohibition of manual interest supplementation that have reduced bank liability costs, as well as future RRR cuts that save on funding costs, after a short period of 'building up strength,' we are more likely to see a downward movement in the LPR (Loan Prime Rate)."

"We believe that the central bank is likely to support this year through RRR cuts or MLF operations, and may also coordinate with interest rate cuts to reduce the financing costs for the real economy," Ming Ming stated. "Considering that the supply of local government bonds will also accelerate starting in May, it may first provide liquidity support through RRR cuts in the second and third quarters, and after the exchange rate pressure eases, it may maintain a low-interest-rate environment through interest rate cuts to help government bonds issue at a lower cost."

It is worth noting that Zhang Xu emphasized that the room for MLF rate cuts is precious and should be used when more needed, not currently.

"Some people believe that bank liability costs should be reduced by lowering MLF rates, but in fact, the impact of MLF rate cuts on bank liability costs is relatively limited. As of the end of March this year, the source of funds for deposit financial institutions in RMB was 355.7 trillion yuan, and from January 2023 to April 2024, the average monthly operation volume of MLF was less than 0.6 trillion yuan. From the perspective of reducing liability costs, guiding the downward movement of actual deposit interest rates and reducing the issuance costs of active liability instruments such as CDs (negotiable certificates of deposit) is clearly more effective," Zhang Xu analyzed.

The reasonable range for long-term government bond yields is 2.5%-3%.

Previously, due to factors such as the slow pace of government bond issuance, the short-term asset shortage in the bond market has become more pronounced, fueling the bullish sentiment in the bond market, and leading to a significant decline in the yields of super long-term government bonds.Since March, the yield on 30-year government bonds has been operating below 2.5% for an extended period, while the yield on 10-year government bonds has been below 2.3%. Since April 8th, the yield on ultra-long-term government bonds has accelerated downward, with the active bond "23 Interest-bearing Government Bond 23" seeing its yield continue to decline and touch the 2.40% threshold.

Recently, the central bank has repeatedly warned of interest rate risks in long-term bond investments. Since late April, the yield on ultra-long-term government bonds has shown a significant rebound, currently rising back above 2.5%. As of May 13th, the yield on "23 Interest-bearing Government Bond 23" has risen to around 2.55%, recovering about 15 basis points from the previous low of around 2.40%.

With the launch of the issuance of ultra-long-term special government bonds and the expected acceleration of local government bond issuance, how will the bond market perform?

On the day the Ministry of Finance announced the issuance plan for ultra-long-term government bonds, all major contracts of government bond futures across maturities closed higher, with the 30-year government bond contract rising by 0.68%, closing at 106.43, but still below the closing price of 108.35 on April 23rd. The yields on the active 30-year government bonds "23 Interest-bearing Government Bond 09" and "23 Interest-bearing Government Bond 23" fell by 2.9 and 4 basis points, respectively, meaning the prices of government bond spot bills rose.

"The current market has an ultra-long-term government bond stock of about 4 trillion yuan, with a plan to issue 1 trillion yuan this year, mainly focusing on 30-year maturities. The issuance of these ultra-long-term special government bonds is not concentrated, so the impact on market liquidity is limited," said Yuan Qi, adding, "After the correction since late April, the market risks have been largely cleared, and the current interest rate level is basically within the range desired by the central bank. The market's short-term concerns have been alleviated, showing a recovery trend."

In the medium to long term, the supply and demand relationship is an important factor affecting the trend of government bond yields. "The financing demand of the real economy has not shown a significant rebound, and it is expected that the asset shortage in the bond market will continue," Yuan Qi predicted that the yield on ultra-long-term government bonds may continue to be stable with a slight decline, and the probability of a trend reversal is not high.

"The issuance of special government bonds will increase the supply of bonds, and the use of fiscal funds will also help improve the fundamentals and boost market expectations. Therefore, theoretically, the issuance of special government bonds will exert an upward push on interest rates. Considering its relatively moderate issuance pace, and the fact that the bond market still has an asset shortage, we expect the adjustment range to be limited, and it may cause some disturbance to government bond yields at specific issuance points," Ming Ming also stated.

"Looking at the market operation after the transition from a stable pandemic period, 2.5%-3% is a reasonable range for long-term government bond yields," a market expert said, "For short-term deviations that appear in the market, the balance of bond market supply and demand will effectively alleviate the deviation phenomenon. In the future, after the central bank includes the buying and selling of government bonds in the regular open market operations, selling government bonds is also a way to balance the supply and demand relationship."