On July 1st, Cailianshe News (edited by Li Xiang) reported that after multiple warnings of long-term bond risks, the market reaction was flat, yields continued to decline, and the bond bull market continued to rise, so the central bank decided to conduct a national bond borrowing operation.

On July 1st noon, the official website of the central bank announced that, in order to maintain the stable operation of the bond market, based on a careful observation and evaluation of the current market situation, the People's Bank of China has decided to conduct national bond borrowing operations for selected public market business primary dealers in the near future.

Strong tremors were felt in the long-term national bond market.

As a result of this news, the national bond futures plummeted during trading. As of 15:30, the national bond futures fell further, with the 30-year main contract falling by 1.09% and the 10-year main contract falling by nearly 0.4%.

Chart: 30-year national bond futures trend

The long-term national bond market showed a strong reaction, with the active bond for 30-year super-long-term national bonds reporting a rate of 2.47%, up 4.65bp, with a total trading volume of more than 2400 transactions throughout the day and a high volatility of up to 8bp.

Chart: 30-year national bond spot price trend

Chart: Interest rate bond market trend

Cheng Xiaoqing, a senior researcher at CITIC Futures' fixed income group, told Cailianshe that despite the central bank's frequent warnings about long-term interest rate risks, the market has shown a dull response. One reason may be that the central bank has less long-term bond holdings and limited operating space. Today's central bank notice will further enrich the central bank's monetary policy toolbox and increase its operational space for selling operations.

Youshan Fund's joint chief investment officer Xu Yongbin told Cailianshe that the central bank's borrowing and lending of national bonds can affect market interest rates and short-term funding pressures. This behavior will increase the supply of national bonds in the market, especially in the previously inactive 30-year national bond market, where this operation directly led to the rise in interest rates, and this strategy signals that the central bank intends to raise interest rates and thus affect the market.

Following the central bank's next move

PBOC Governor Yi Gang previously said at the Lujiazui Forum that the rapid development of the financial market has also brought new challenges to the central bank. The risk events of the Silicon Valley Bank in the United States have reminded us that central banks need to observe and evaluate the financial market situation from a macro-prudential perspective, and take timely action to correct and prevent the accumulation of financial market risks. Currently, we need to pay attention to some non-bank entities that hold a large amount of medium and long-term bonds that are mismatched in terms of maturity and interest rate risks, maintain a normal upward sloping yield curve, and maintain a positive incentive effect on investment in the market.

Xu Yongbin told Cailianshe that China's banking industry has few tools to manage duration, and an increase in interest rates will directly affect the net asset value of the market. From this perspective, today's central bank notice to conduct national bond borrowing operations is not only to guard against the risk of maturity mismatch, but also to prevent the accumulation of interest rate risk due to the market's unilateral bet on the long-term interest rate decline.

Yang Weijiao, assistant director of Guoyuan Securities Research Institute, told Cailianshe that the central bank's "borrowing and lending of securities" operation may lead banks to allocate more funds to short-term National bonds to meet liquidity needs, thus affecting the prices and interest rate trends of long-term and short-term national bonds.

Yang Weijiao pointed out that although the central bank can directly hold national bonds and negotiate loans with primary dealers, such operations have not been widely heard of before, and involve many factors such as laws, policies, and market participants' willingness. Subsequent measures by the central bank will need to be closely monitored.

It is reported that the counterparties of the central bank are mainly primary dealers, and the trading counterparties of primary dealers are small and medium-sized banks at all levels. Market participants said that the central bank's bond borrowing is a credit borrowing or a pledge of bonds (or central bank bills) to primary dealers. It is not clear yet and the answer is expected soon.

An insider of an institution told Cailianshe that the central bank's OMO market operations notice should be closely watched in the near future and the policy direction for the future will be clarified, which may happen soon.

The above insider also said that today's operation continued the main content of Friday's monetary policy meeting, which is putting a long-term bet and will have a hedge on the varieties. In addition, since the amount of short-term interest rates is far higher than that of long-term interest rates, it is estimated that it will not have an impact on the interest rate structure of the short-term bond market, and liquidity management is also a focus of the central bank.

Galaxy Futures told Cailianshe that the central bank's release of information related to bond borrowing means that the sale of bonds in the secondary market will soon make actual progress. In the short term, this news may continue to ferment and drive the bond market's sentiment to weaken. Pay attention to the actual scale and specific terms of the central bank's borrowing bonds in the future.