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For The First Time In 2008! Sino-US One-year Government Bond Spreads Upside Down
- Nov 16, 2018 -

CITIC clearly believes that the United States is in a rate hike cycle, short-term government bonds are rising faster, and China is currently shifting from declining leverage to stable leverage, increasing market liquidity, resulting in lower interest rates on government bonds. Therefore, it is also expected that the interest rates of the two countries' national debt will be reversed.

The US monetary policy continued to tighten, and the liquidity of the Chinese market was relatively loose. Under the influence of completely different environments, the spread of Sino-US one-year government bonds also fell.

The yield on China's 1-year government bonds is now at 2.53%, and the US government bond yield is at 2.68%. The two are currently upside down by about 16 basis points, the first time since 2008. Since the beginning of this year, the yield on China's 1-year government bonds has dropped by about 130 basis points. Earlier, interest rates for 3 months and 6 months have been reversed.

Bloomberg cited the head of CITIC Securities's fixed-income research, Ming Ming, saying that the US is in a rate hike cycle, and short-term government bonds are rising faster. China is now shifting from declining leverage to stabilizing leverage, increasing market liquidity, resulting in lower interest rates on government bonds. It is also expected that the interest rate of the national debt will be reversed.

It is also clear that the Chinese central bank is expected to cut interest rates next year, and the spread of 10-year government bonds between the two countries may further approach zero or even upside down next year. As to whether this will put the exchange rate under pressure, it is clear that the most important factor affecting the exchange rate is the balance of payments. Although the interest rate of the national debt is one of the factors affecting the exchange rate, it "will not lead to the depreciation of the RMB exchange rate."

Last month, CICC research analysts Chen Jianheng, Dong Xu, Wei Wei, Niu Jiamin and others mentioned in the report that if the downward pressure on the Chinese economy increases, then monetary policy still has the pressure and motivation to relax. Even if monetary policy is not loose, the 7-day reverse repo rate will remain at 2.55%. As the US continues to raise interest rates, such as raising interest rates to 3%, the US benchmark interest rate and China's benchmark interest rate will be reversed. The report reads:

If the US raises interest rates to 3%, the US 3-month government bond yield will probably reach 3%. Unless China’s current 3-month government bond yields rise sharply, the US short-term government bond yields exceed China’s probability. .

The China Gold Corporation has pointed out that for long-term government bonds, even if monetary policy is no longer relaxed next year, interest rates will fall, and the downside of broad-spectrum interest rates will go down, because asset shortages may occur again next year. According to this inference, next year's Sino-US spread will have a low probability of being in the long end and will be upside down.

For investors, the China Gold Corporation's collection team believes that one thing to worry about is that 60% of the net increase in government bonds this year is held by overseas institutions. Once the yields of Chinese and US government bonds are getting closer or even upside down, the demand of foreign investors will tend to decrease. The report states:

If we look at the amount of debt bought by foreign institutions in the past two months, there has actually been a significant decline. However, if the spreads are upside down, the incentives for foreign institutions to buy Chinese government bonds will be greatly reduced.