On August 8th, Caixin reported (Editor: Li Xiang) that after the "basket of measures" was introduced today, the bond bull trend was "curbed." National bonds have fallen across the board, and the 7Y national bond coupon once fell 7.3bp, strengthening the trend reversal.

Although the institutions are still relatively bullish, many people are already calling for attention to the risks of the bond market. Currently, the signal of tighter liquidity has already emerged, with DR007 continuing to be above 1.7%, and we need to closely monitor the continuity of strong supervision and tight liquidity.

Some financial market professionals have pointed out that borrowing debt from the central bank itself will not cause changes in market liquidity, but selling national debt will recycle market liquidity, depress the prices of relevant national debt markets, and to some extent push up long-term national bond yields. From the perspective of the central bank's intentions, this behavior is not a tightening signal, but is to maintain a steeper yield curve.

Focus on the next moves of major banks and central banks.

Recently, the sale of bonds by major banks has led to a rapid rise in interest rates. How major banks and central banks will operate next will largely determine the pace of the market game.

From the perspective of institutional behavior, Caixin reported previously that from August 5th to 6th, major banks sold more than 60 billion yuan of national debt, with 7-10Y national bond coupons as the main sales varieties. In addition, Caixin learned from an industry insider that on August 7th (yesterday), major banks were still the main sellers of national debt, but in addition to continuing to sell 7-10Y national bond coupons, they were also gradually selling 10Y national bond coupons, with slightly insufficient preparations.

Affected by the news at the end of yesterday, institutions competed to initiate hedging transactions, and major banks' net selling "counterparty" was mainly various types of asset management companies, with agricultural and commercial banks taking over the third place in scale, but still purchasing national bond coupons of more than 10 billion yuan.

Guokai Macro team said that how major banks and central banks will operate is crucial, but who will take over the central bank's trades is also worth paying attention to. From the recent behavior of institutions, agricultural and commercial banks and public funds bought more, but this obviously contradicts the original intent of reducing the duration mismatch and interest rate risk caused by small and medium financial institutions and non-bank holding of bonds.

Although the China Foreign Exchange Trading System twice took strict measures, releasing self-discipline penalties and violations of national bond trading, market insiders said that from the perspective of the magnitude of their involvement, only four agricultural and commercial banks yesterday were actually able to take over limited amounts of bonds. Brokerages and asset management firms played obvious long positions, and rumors surfaced in the final trading period that brokerages' proprietary trading and asset management had also been instructed, causing the bond market to quickly weaken again and market risk aversion to soar.

The above market insiders said that although the incident has received regulatory attention, the focus of regulation is not to punish these banks, but to adjust and manage the long-term interest rate trends of national bonds. They want to establish their credibility. Usually, the trading strategies of these agricultural and commercial banks are mainly high-frequency and short-term, and they probably followed the major banks in selling at the beginning, but bought back at lower levels.

It is worth noting that analysts have pointed out that events related to the transfer of interests often occur at the end of a bond bull market, such as the 2013 "Grade C account" that caused a bond market storm, and the settlement of interest rate bonds during the asset shortage in 2016.

Be cautious of bond market risks, and trading sentiment may cool down.

With large banks lending and small banks buying bonds, today's market has reversed significantly, with 7Y and 5Y national bonds adjusting the most. As of 8 PM, the 7Y national bond has fallen back above 2% to 2.016%, up 6.9bp, while the 5Y period has risen 4bp to 1.84%, and the 10Y period has fallen back 3.2bp to 2.172%.

Although institutions remain relatively bullish, many institutions have stated that the fundamental factors and supply and demand structure still support the bond market, and the medium- to long-term trend is difficult to reverse. However, there may be short-term problems in terms of point positions and space, especially considering the central bank's lending and selling of bonds, the increase in government bond supply and incremental policy adjustments causing disruptions to the bond market.

There has been a significant increase in institutional purchases of bonds recently, which is somewhat similar to the bond bull market in 2016, with prevalent trading and extremely low interest rates. If we want to maintain a steeper yield curve for national bonds, it's likely that strong supervision and tight liquidity are necessary.

From the current situation of funds, since August, the intention of the central bank to tighten liquidity has been apparent. In July, the central bank net invested 80.966 billion yuan, but as of the past six trading days in August, net capital has already been withdrawn by 135.31 billion yuan. As of 5 PM, DR001 was up 6.33bp to 1.6924%, while DR007 was up 5.08bp to 1.7731%. The issuance rates of interbank negotiable certificates of deposit of national commercial banks have mostly risen, with a 1-year term rate ranging from 1.82% to 1.89%, and several banks adding 2-4bp from yesterday. We need to continue to monitor the sustainability of the liquidity withdrawn.

Chart: People's Bank of China Open Market Operations

Data source: Wind, Cailian News

In addition, other industry insiders pointed out that looking at the bond bull market from 2016 to 2017, institutional investors continued to actively leverage bonds under the absence of fundamental support in the market and liquidity-related price factors until the financial regulation strengthened in 2017, especially in the inspection and regulation of interbank outsourcing and off-balance-sheet activities, which had a significant impact on the bond market during the deleveraging process, resulting in a change in the market bullishness.

According to the statistics of Zhongtai Fixed Income Team as of August 4, the overall leverage ratio of the interbank market was 108.1%, still at 43% percentile, but the leverage ratios of banks, brokerages, insurance, and broad-based funds have all increased. Among them, the leverage ratio of broad-based funds has reached 116.3%, already in the 82nd percentile. (Leverage ratio = bond custody amount/(bond custody amount-pledged repo balance)*100%)

Huaxi Fixed Income Team said that in the short term, 2.10% and 2.30% will be difficult to challenge as the bottom line for 10-year and 30-year national bonds, and future trading may be light. Some market participants also expressed that considering the speculative atmosphere of the current national bond market and the recent ups and downs of the mid-to-long-term interest rate bond market in the past three trading days, the speculative atmosphere of the mid-to-long-term interest rate bond market may cool down in the future.