Will Pingzhun Foundation Come? Stock-Bond Seesaw Continues; Policy Expectations Disrupt Bond Market Sentiment

The bond market adjustment is still ongoing. On October 23rd, government bond futures continued to close lower across the board. Industry insiders interviewed by First Financial believe that in the absence of significant changes in the fundamentals, changes in the market's liquidity are mainly disturbed by expectations and emotions. On one hand, there is the seesaw effect between stocks and bonds, and on the other hand, there is the expectation of additional policies.

Among many speculations about additional policies, a recent proposal to "issue 2 trillion yuan in special treasury bonds to establish a stock market stabilization fund" has become a major focus that disturbs the market. An institutional source told First Financial that the stabilization fund has significant positive implications for A-shares, but whether the scale can directly reach 2 trillion yuan and whether it needs to be issued through special treasury bonds are still in doubt. The source believes that in the short term, special treasury bonds may first need to support state-owned large banks in replenishing capital.

There is still disagreement among institutions about the future trend of the bond market. Many analyses believe that the strength of the bullish forces is weakening, and this round of fluctuations will last for a longer time. CITIC Securities FICC analyst Qiu Yuanhang believes that the key to focus on later is whether the scale of additional policies determined by the National People's Congress exceeds expectations. If it meets expectations, the bond market still has a chance to rebound.

The seesaw effect between stocks and bonds continues. On October 23rd, the three major A-share indices fluctuated, with the Shanghai Composite Index rising by 0.52% to stand above 3,300 points, the Shenzhen Component Index rising by 0.16%, the ChiNext Index falling by 0.53%, the Beijing Stock Exchange 50 Index rising by 4.24%, and the turnover of the Shanghai, Shenzhen, and Beijing markets exceeding 1 trillion yuan for 16 consecutive trading days, reaching 1.9648 trillion yuan, an increase of 4 billion yuan compared to the previous day.

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The bond market continued to decline, with government bond futures closing lower across the board. The 30-year main contract fell by 0.45%, the 10-year main contract fell by 0.18%, the 5-year main contract fell by 0.11%, and the 2-year main contract fell by 0.04%. On the same day, the yield of the 10-year active government bond and the 30-year active government bond rose by 0.25BP and 1BP, respectively, to 2.14% and 2.3525%.

The correction in the bond market has lasted for more than a month, with the correction of government bonds starting at the end of September and the correction of credit bonds starting in August. The press conferences held by the State Council Information Office on September 24th and October 12th were important policy release nodes. A series of stimulus policies boosted market confidence and also led more funds to shift to the stock market, especially against the backdrop of a sharp rise in the stock market before the National Day holiday, concerns about redemption of bond funds and financial management also loomed over the bond market. However, the credit bond market has been somewhat boosted recently due to debt repayment expectations, and interest rate bonds regained a mild bull market momentum after the stock market correction after the National Day holiday.

However, since last week, under the seesaw effect between stocks and bonds, the reverse adjustment of the bond market has further intensified. On October 22nd, interest rate bonds continued to adjust after the stock market closed, with the yield of the 30-year active government bond rising by 3.5BP throughout the day, exceeding market expectations. On the same day, the adjustment of investment-grade credit bonds represented by bank perpetual bonds was also quite severe, with some perpetual bonds adjusting by 8BP, and some municipal bonds were not immune.

Comprehensive institutional and market views indicate that the bond market has been in greater fluctuations in the past two days, affected by multiple factors, including the recent new round of concentrated adjustments in deposit interest rates, the high level of interbank deposit certificate rates indicating liquidity pressure, and the resurgence of suggestions for a stock market stabilization fund."At present, it is mainly emotional factors that have caused the seesaw phenomenon between stocks and bonds to be very obvious in recent days," Qiu Yuanhang told Yicai, stating that the current influencing factors for interest rate bonds are mainly twofold: one is the seesaw between stocks and bonds, and the other is the expectation of incremental fiscal policies.

"Credit bonds have added a liquidity risk on the basis of interest rate bond adjustments because during the National Day holiday, when the entire market was adjusting, credit bonds fell quite a bit. The main reason is the selling of credit bonds due to redemption or precautionary redemption, which makes the discount more significant, thus the adjustment intensity is greater than that of interest rate bonds," Qiu Yuanhang analyzed.

Looking at the long-term trend, in the view of many market analysts, the current adjustment in the bond market will be long-term, and the reasons are also multifaceted. On one hand, as macroeconomic policies shift, the logic of bond market bullishness has undergone an essential change, and the current period is a window from high expectations to actual implementation. On the other hand, with the issuance of special government bonds, the increase in large-scale debt limits, and other measures being implemented, the asset scarcity will gradually be alleviated over a certain period.

From the perspective of asset allocation, considering the cost of interbank funds and the trend of the wealth management market, some institutions are not optimistic about the allocation power of the bond market in the following period. However, Lv Pin, a fixed income analyst at Debon Securities, believes that with the reduction of both deposit interest rates and existing mortgage interest rates, the lower deposit interest rates will enhance the cost-effectiveness of lower-risk bond assets (wealth management, short-term bond funds, etc.), increasing the demand for bond allocation through the migration of deposits, especially benefiting short-term bond varieties. In addition, after the reduction of the LPR (Loan Prime Rate), compared to long-term loans, the cost-effectiveness of long-term bonds will also be further highlighted. Based on the leading relationship between mortgage interest rates and 30-year government bond interest rates, the downward space for long-term interest rate centralization will be further opened.

Lv Pin believes that, after excluding the short-term "seesaw" effect of the equity market, the current bond market interest rates may still be too high, mainly due to the current monetary policy being loose while funds are not loose, and the loose money has not entered the market in the short term. "Therefore, in the medium term, bond interest rates may return to their own logic after the disturbance, and be re-priced in the next round of reserve requirement ratio cuts and interest rate cuts, presenting a bull market for both stocks and bonds," he said in a recent report.

Qiu Yuanhang believes that there has been no significant change in the supply and demand of the bond market at present. Under the dominance of emotions, the most core factor affecting the bond market in the following period is still the upcoming session of the Standing Committee of the National People's Congress. Whether the final scale of incremental fiscal policies will exceed expectations is key. "If it meets expectations after implementation, there is still a chance for the bond market to rebound," he said.

At present, the market has a positive expectation for fiscal stimulus, but there is still a significant divergence in its strength and implementation effect. In a recent report, the fixed income team of Fawen Financial pointed out that an increasing number of signals indicate that the strength of fiscal stimulus may exceed market expectations, mentioning recent signals including the issuance of special refinancing bonds in various places, including some provinces that have cleared hidden debts. The report believes: "Once fiscal stimulus exceeds expectations, the 10-year government bond yield should also be higher than this central point (2.1%) by a step."

"(Currently) the policy still does not seem to be in a state of a one-time comprehensive large-scale effort. Even if it is implemented, the market may still need to observe and verify the subsequent transmission effects," Sun Binbin, a fixed income analyst at Tianfeng Securities, believes that unless the strength of fiscal stimulus is sufficiently beyond expectations, there is no short-term direct reversal risk in the bond market.

The expectation of the stabilization fund heats up again

Among the many possible "beyond expectations" incremental policy expectations, the market's focus has recently turned to the "stock market stabilization fund," which is also considered an important reason for the significant adjustment of the bond market on Tuesday. The background is a report released by the Chinese Academy of Social Sciences that day.According to media reports, on October 22nd, the Institute of Finance and Banking of the Chinese Academy of Social Sciences released the macro-financial analysis report for the third quarter of 2024 titled "Emphasis on Both Stock and Flow: Innovation in Macroeconomic Governance Thinking." The report mentioned several suggestions for enhancing the inherent stability of the capital market: First, to accelerate the entry of medium and long-term funds into the market, for example, by moderately increasing the proportion of insurance company funds invested in the stock market and raising the proportion of local social security funds indirectly entering the market through the National Social Security Fund Council. Second, to strengthen the convenience of swaps between securities, funds, and insurance companies and coordinate with the central bank's buying and selling of government bonds to achieve effective linkage between the money market and the capital market, with the central bank providing low-cost liquidity support to the stock market when necessary. Third, to issue 2 trillion yuan in special government bonds to support the establishment of a stock market stabilization fund, which would promote market stability through buying low and selling high of blue-chip leading stocks and ETFs.

Previously, in response to the issue of a stabilization fund, the central bank governor Pan Gongsheng revealed after a press conference held by the State Council Information Office on September 24th that "research is underway," a piece of news that once triggered a collective counterattack in A-shares. Following the positive signal released by the relevant person in charge of the Ministry of Finance on October 12th, CCTV news reported on the 22nd that the National Development and Reform Commission stated that nearly half of the incremental policies have been introduced and implemented, and the rest of the incremental policies will also be accelerated.

A series of information has once again sparked market speculation. In fact, since the beginning of this year, A-shares have fallen into a deep adjustment, and in January, the State Council's executive meeting once again proposed to increase the intensity of medium and long-term funds entering the market, suggesting the establishment of a stock market stabilization fund, the call for which has been echoing ever since, with continuous discussions on the sources of funds and methods of collection, forms, and scale settings. At the end of September, Zhang Ming, the deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences, proposed the aforementioned suggestions in an exclusive interview with First Financial Daily.

Since the beginning of this year, many experts and scholars have publicly offered advice on the establishment of a stock market stabilization fund. For example, Liu Jipeng, the former dean of the Business School of China University of Political Science and Law, stated at the 18th China Investment Annual Conference held in May this year that the Ministry of Finance should issue a special government bond to banks as a stock market stabilization fund; Tian Xuan, the vice dean and chair professor of finance at Tsinghua University's Five Daokou School of Finance, also suggested that a trillion-level stabilization fund should be launched as soon as possible.

Now, with the overall shift in macro policy, changes in market expectations for the economic fundamentals, and increased market volatility, the suggestion to establish a stabilization fund in a timely manner has once again attracted widespread attention. However, some institutional insiders told First Financial Daily that, as an important tool for stabilizing the market, the introduction of a stock market stabilization fund undoubtedly has a positive and significant meaning for A-shares, but whether it will directly reach 2 trillion yuan is questionable.

Looking at the global context, countries and regions such as the United States, Japan, South Korea, Hong Kong, and Taiwan have all taken similar measures to a stock market stabilization fund to rescue the market. In the view of many interviewed, the establishment of a stabilization fund is very necessary, and we currently have the conditions to establish it. According to CITIC Securities' previous calculations based on market practice, the scale of the stabilization fund is mostly between 3% and 6% of the total market value, with an expected scale ranging from 2 trillion yuan to 4 trillion yuan.

Li Xunlei, the chief economist of Zhongtai Securities, previously stated in an interview with First Financial Daily that the Ministry of Finance could issue special government bonds specifically for stabilizing the capital market, with an initial scale of 1 trillion yuan, and the total scale could be designed as 3 trillion yuan, with the Ministry of Finance's 1 trillion yuan share as a subordinate fund. The issuance of special government bonds could be subscribed by the central bank to avoid tightening liquidity. The remaining 2 trillion yuan of funds could be raised from medium and long-term investment institutions such as banks, securities firms, insurance companies, social security funds, enterprise annuities, and occupational funds.

However, the aforementioned institutional insiders believe that considering that special government bonds will be used to recapitalize state-owned large banks in the short term, it is unlikely to issue additional bonds for the establishment of a stabilization fund, "there needs to be a sequence."