The LPR quote for July has been released, with both the 1-year and 5-year LPR seeing a 10 basis points decrease in interest rates.

On Monday, July 22nd, the People's Bank of China authorized the National Interbank Funding Center to release the loan market quote rate (LPR) for July 22nd, 2024: the 1-year LPR is 3.35%, and the LPR for 5 years or more is 3.85%. Both decreased by 10 basis points compared to the previous value, which remained unchanged for four consecutive months.

The central bank stated that in order to improve expectation management and better align the LPR release time with the financial market's operating time, effective July 22, 2024, the LPR release time will be adjusted from 9:15 am on the 20th of each month (postponed in case of holidays) to 9:00 am.

On the same day, the central bank also announced that the Open Market Operation (OMO) of 7-day reverse repurchases will be adjusted to a fixed rate and quantity tender, and the operation rate will be adjusted from the previous 1.80% to 1.70%. On Monday, the reverse repurchases of 58.2 billion yuan were conducted by fixed rate and quantity tender, while previously it was conducted by interest rate tender.

In order to increase the trading volume of bonds and ease the pressure of supply and demand in the bond market, institutions that participate in the Medium-term Lending Facility (MLF) and have a demand for selling mid- to long-term bonds can apply for phased reduction of MLF pledged collateral since this month.

After the announcement, offshore RMB against the US dollar fell in short-term, falling below 7.2900. The yields of the 10-year Treasury bonds and national development bonds, as well as the active certificates of super-long-term national bonds, all declined.

Previously, SWHY report pointed out that the LPR mechanism reform and the expectation of a rate cut are both strong. On the one hand, pay close attention to whether LPR will decouple with MLF and OMO while completing policy interest rate reform and focusing more on short-term policy interest rates; on the other hand, considering the current obvious weakness in credit demand and that the 7-8 months are in the mid-year steady growth window, although the central bank is still concerned about the risk of long-term bonds, the necessity of lowering LPR is still strong.

It is expected that if the LPR quotation is lowered this time, it will drive the phase-wise rapid decline in bond yields. Considering the low tolerance of the central bank for rapid decline in long-term bond yields, it is not ruled out that the central bank will adjust long-term bond yields by borrowing and selling national bonds, which is expected to significantly amplify fluctuations in long-term bond yields.

CITIC Securities research report pointed out that, with reference to overseas experience and recent policy statements, the LPR quotation mechanism may be improved to enhance policy efficiency and marketization level, and the LPR quotation in the short term may also be lowered, creating more suitable policy conditions for credit recovery.

Huachuang fixed income stated that the LPR and MLF interest rate differential is relatively high and may have some room for compression. Currently, the LPR and 1-year MLF interest rate differential is 95bp, which is at a historically high level. In the context of the marginalization of MLF medium-term policy rate centralism, it is not ruled out that the policy rate will remain unchanged, and there may be a possibility of lowering LPR quotation and slightly increasing the margin between LPR and MLF. In the recent stage of accelerated monetary policy framework reform, the main focus is on the possibility of lowering the 1-year LPR and gradually decoupling it from MLF.

For the bond market, if adjustments are made, it is expected that the disturbance of "loose credit" may be relatively limited. Current expectations for households and corporate sectors are weak, and if the LPR is lowered alone, it may have limited impact on boosting expectations for "loose credit". In addition, from the perspective of comparative effects, it may have a certain positive effect on the bond market.

Edited by Jeffrey