Finance Association, April 24 (Editor Liu Chen) 10-year treasury bonds have been running below 2.3% for nearly a month. Yesterday's low hit 2.215%. In extreme markets, 30-year treasury bonds also ushered in a historic moment below MLF. There is no shortage of lament in the industry that “market breakthroughs have been recognized, and pricing is impossible to get started”. Institutional analysts say “MLF's strategy for pricing medium- and long-term bonds has weakened.”

In the traditional bond interest rate pricing system, the market is accustomed to observing the short end with the capital interest rate DR007, observing the long end with MLF, and then positioning the mid-range and ultra-long interest rates through the historical level of interest spreads. The fixed income department of Zheshang Bank once issued a document stating that MLF was clarified by the central bank as the medium-term benchmark interest rate in August 2020 and had an impact on treasury bond interest rates. 10-year treasury bonds operate with MLF as the center, and the operating range was reduced from the initial MLF to the range of 15-20 BP above and below the current MLF.

Since December of last year, the yield on long-term and ultra-long-term bonds has declined a lot. 10-year treasury bonds have been lower than MLF interest rates for more than 3 months, and April 30-year treasury bonds have also ushered in a historic moment below MLF. According to Wind data compiled by the Financial Federation, as of yesterday's closing, the yield on 10-year treasury bonds was 27.68 bps lower than the MLF interest rate, and the yield on 30-year treasury bonds was 9.2 bps lower than the MLF interest rate. Furthermore, the interest rate spread between 10-year treasury bonds and 30-year treasury bonds has narrowed to 19.88 bps, which is the historical quantile of 5.79%.

The Financial Federation learned that after the People's Bank of China guided the interest rate self-regulation mechanism to establish a market-based adjustment mechanism for deposit interest rates, the member banks of the self-regulatory mechanism adjusted deposit interest rates reasonably by referring to bond market interest rates represented by 10-year treasury bond yields and loan market interest rates represented by 1-year LPR. Establish a transmission mechanism between MLF interest rate - LPR quotation and 10-year treasury bond interest rate - deposit and loan interest rate to link the bank's debt side with the asset side.

However, the current MLF reference point for pricing interest rates on 10-year treasury bonds seems to be weakening. Jin Yi, head of fixed income at Guohai Securities, pointed out that this may be due to the central bank's interest rate cut strategy, which is changing from “MLF-LPR linked interest rate cuts” to “deposit interest rate-LPR linked interest rate cuts.” From December 2023 to February 2024, the bond market just experienced a round of deposit interest rate and 5-year LPR cuts, but MLF interest rates remained unchanged. For commercial banks operating on their own, loans and medium- to long-term interest rate bonds are mutually replaceable assets. However, the MLF was not adjusted at the same time, so the deduction points for medium- and long-term bonds compared to MLF may increase. If medium- and long-term bonds are simply priced from the perspective of the historical quantile of “MLF plus and minus points,” the strategy will weaken somewhat.

Since April, active 10-year treasury bonds have always operated below 2.3%. Yesterday's low reached 2.215%. In extreme markets, the market needs more effective references to anchor interest rates for various periods in the bond market. Sun Binbin, head of fixed income at Tianfeng Securities, said that whether it's the golden rule or the neutral interest rate theory. According to central bank logic, the anchor is internal and external equilibrium. The internal balance is growth and inflation. The index can be thought of as the nominal GDP growth rate, and the external equilibrium, which may be reflected in exchange rate fluctuations and differences between China and the US.