In May, banks engaged in large – scale bond sales due to the instability on the liability side caused by the reduction in deposit interest rates. State – owned commercial banks sold bonds worth over 500 billion yuan in total during the month. Although rural commercial banks sold relatively smaller amounts of bonds, they too faced pressure on their liability side. Meanwhile, insurance companies emerged as the largest bond buyers and extended their bond duration.
After the “deposit transfer” phenomenon, funds and wealth management products witnessed a significant influx of capital. For a time, they rushed to purchase credit bonds, which led to a substantial narrowing of the interest rate spreads of medium – and short – term bonds. However, the fervor for credit bonds in May somewhat subsided later. Industry experts opine that after the rush to buy high – yield credit bonds, the market for credit bonds with longer durations and higher yields has become highly crowded, making it prone to corrections due to market fluctuations.
Banks’ Bond – selling Spree and Insurance as Buyers
According to industry – sourced institutional behavior data, state – owned commercial banks have been the main drivers of bond sales recently. In the last week of May, major banks sold 12.1 billion yuan worth of interest rate bonds, mainly by offloading long – term government bonds and local bonds. In total, they sold 112.6 billion yuan worth of interest rate bonds in May. Rural commercial banks sold 20.5 billion yuan worth of interest rate bonds, primarily government bonds, with a total of 265.2 billion yuan in interest rate bond sales for the month. State – owned commercial banks generally reduced their holdings of credit bonds, commercial bank perpetual bonds, and interbank certificates of deposit, with the total selling scale of these three bond types exceeding 500 billion yuan in May.
In fact, since May, credit bonds have outperformed interest rate bonds. The yield of 10 – year government bonds initially dropped to a low level and then fluctuated upward, finally ending an “eight – day consecutive decline” on the daily chart.
The FICC team of Zhejiang Commercial Bank noted that the overall balance sheet of commercial banks may be under significant pressure, restricting their bond – absorbing capabilities and allocation needs. This could be the main reason for this round of “slight decline” in the bond market. The overall net interest margin of commercial banks has decreased. At the same time, they are tasked with supporting small and medium – sized enterprises, promoting scientific and technological innovation, and ensuring the smooth issuance of government bonds, all of which pose significant challenges to commercial banks’ capital accumulation.
In May, ultra – long – term government bonds saw a significant performance. The reduction in deposit interest rates triggered “deposit migration”, raising concerns about the stability of major banks’ liability side and their ability to absorb bonds.
Qian Han, the chief of fixed income at Zheshang Securities, speculated that after the deposit rate cut, the liability side of major banks tightened. From an asset – liability perspective, their demand for bond purchases was not substantial, which might be in line with the central bank’s policy intentions. In the second half of 2024, major banks bought a large number of short – term bonds, which are now maturing one after another, and the second quarter of this year is a peak period for treasury bond issuance.
In the last week of May, rural commercial banks slightly increased their holdings of interest rate bonds by 4.5 billion yuan. However, they still reduced their holdings of treasury bonds and local government bonds. Their purchase volume of interest rate bonds decreased significantly compared to the previous two weeks, and they also cut their holdings of interbank certificates of deposit by 10.2 billion yuan.
Li Qinghe, the chief of fixed income at Fangzheng Securities, believes that in the face of “deposit migration” and tight funds at the end of the month, rural commercial banks are under pressure on the liability side and are forced to reduce their liquid assets.
Insurance companies have become the largest bond buyers recently. Data shows that in the last week of May, insurance companies purchased 18.3 billion yuan worth of interest – bearing bonds, mainly long – term treasury bonds and local government bonds, with a total of 90.4 billion yuan in interest – bearing bond purchases for the month. They also bought interbank certificates of deposit and credit bonds.
Slowdown in Credit Bond Buying Frenzy
After the implementation of the deposit interest rate cut, the market generally expected that non – banking products such as wealth management and funds would receive a large influx of capital, driving the strengthening of credit bonds. According to Wind data, taking the spread of AA+ short – term commercial paper as an example, the spreads of 1 – year, 3 – year, and 5 – year bonds were compressed by 14BP, 13BP, and 10BP respectively at their peak in May. However, the spreads of short – term credit bonds rose slightly last week.
From the perspective of institutional behavior, banks and funds have continued to purchase credit bonds recently, but the purchase volume has declined in the two weeks following the deposit rate cut. In the last week of May, funds purchased 18.7 billion yuan worth of credit bonds, a decrease of over 50 billion yuan compared to the previous week. Additionally, funds sold government bonds, policy financial bonds, commercial financial bonds, and perpetual bonds.
Financial products have a relatively strong ability to absorb various types of bonds. In the last week of May, financial products purchased 19.6 billion yuan of credit bonds, a decrease of over 10 billion yuan compared to the previous period. At the same time, they also bought government bonds, interbank certificates of deposit, and commercial bank two – year and perpetual bonds.
Regarding the credit bond market, the FICC team of Zhejiang Commercial Bank believes that after the current round of aggressive high – yield bond buying, the current market trend of seeking returns through duration is also highly crowded. At the end of the month, due to the disturbance of the tariff ban, the market experienced a correction. In a volatile market without a clear main trend, it is easy to trade short – term negative factors in advance. However, the reality of the fundamentals and the long – term logic of asset scarcity determine the credit bond investment strategy of high yield + moderate downgrading.
Li Qinghe believes that recent institutional behavior reflects multiple logics. Rural commercial banks are reducing their balance sheets to cope with the stratification of the capital market; wealth management products are expanding due to the shift in the liability side and need to maintain stable net values through medium – and short – term bonds; funds are converging in risk preference to avoid interest rate fluctuations and potential redemptions; insurance companies are adopting a long – term investment strategy to lock in returns due to the asset shortage pressure caused by the stable growth of premium income. Short – term trading is still restricted by fluctuations in capital interest rates and policy expectation games.
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