Core viewpoints

What are the ways to influence financial factors:The main influence channels of ① on bond market are liquidity effect (changes in fiscal deposits caused by fiscal financing and fiscal revenue and expenditure) and emotional effect (emotional disturbance caused by the increase of government debt supply and primary issuance), while the main influence channel of ② on broad liquidity is the increase of M2-derived multiplier effect.

The "emotional shock" of the increase in the supply of key-term treasury bonds is not obvious, and the average daily impact is about 0.4Bps.We have counted the announced issuance of key-term treasury bonds since 2019, and observed the changes in the maturity yield of 10-year treasury bonds and Chinese open bonds on the same day: on the day when the supply of ① treasury bonds increased in the past two years, the yield of 10-year treasury bonds rose by an average of 0.42 BP per 10-year 0.47Bp. If ② calculates that the issuance volume of treasury bonds has increased by more than 20 billion yuan month-on-month, the average yield of 10-year treasury bonds has risen by about 0.6 BP, and the average yield of 10-year bonds has risen by about 0.9Bp.

The increase in net financing of government debt has led to an increase in the price of interbank capital.Judging from the experience in 2020, when the net financing of government bonds exceeds 600 billion yuan a month, the weighted interest rate center of bank pledge repo may rise by 10-15Bps.Government bonds are expected to have less disruption to the capital side in the second quarter of this year than last year.Recently, the stock market has cooled down, and the "money-absorbing" effect of equity asset management institutions has weakened, so more customer reserves have been transferred from equity funds to other types of asset management products; at the same time, considering that the net financing amount of all kinds of bonds is not high recently, some customer reserves have precipitated into non-silver deposits. As the current total amount of non-silver deposits is relatively high, although the current bank overreserve rate is relatively low, the reserve funds of non-silver institutions are relatively sufficient.

How fiscal revenue and expenditure affect broad monetary volume: M2 growth may slow down.After taking into account the bank deposits directly created by fiscal deposits, if the cash leakage rate is c and the comprehensive deposit reserve ratio is r, then the "money multiplier" of fiscal investment is 1 / (r+c-rc). If we use the balance sheet of the central bank to roughly estimate the cash leakage rate c and the average reserve ratio of commercial banks, we can find that the multiplier effect of fiscal input on M2 is about 7.62 times. This ratio is higher than the current full-caliber monetary multiplier of 6.95 times. Therefore, the M2 growth rate will also be higher in months with more fiscal spending. As the overall fiscal revenue will be "more revenue than expenditure" in the second quarter, fiscal expenditure will create less M2, M2 growth will also be closer to credit growth, and broad money growth is expected to slow.

Outlook for the future:For the bond market, there are three main ways of fiscal factors: emotional effect (emotional disturbance caused by the increase in the supply of government debt and primary issuance), liquidity effect (changes in fiscal deposits caused by fiscal financing and fiscal revenue and expenditure) and broad money (the month of high fiscal expenditure is often also the month of upward M2 growth). From the perspective of historical experience, the impact of the increase in the supply of treasury bonds on the yield of treasury bonds is not significant, while the tightening of inter-bank funds brought about by the rising net financing of government debt is more noteworthy; however, considering the current pattern of relatively abundant reserves of non-bank institutions, the impact of the rise in government debt supply on the capital side may be relatively moderate. In addition, considering that the overall fiscal revenue in the second quarter is "more revenue than expenditure", the growth rate of M2 broad money may slow. Overall, considering that there are still some bearish financial factors in the second quarter, the capital side and bond yields may be hit by some time.

Text

The COVID-19 epidemic in 2020 had a great impact on the global economy. In order to hedge the pressure of rapid downward economic growth, China adopted a more active fiscal policy last year.

With the gradual elimination of the impact of the epidemic, the marginal strength of China's fiscal policy has decreased this year: the deficit ratio has dropped from 3.6% to 3.2%, special anti-epidemic treasury bonds have no longer been issued, and the amount of new local government special debt has also been slightly reduced.

However, judging from the progress of government bond issuance in the first quarter of this year, the pressure on the supply of the remaining government bonds during the year is still not small; at the same time, the high level of fiscal revenue in the second quarter will also make the impact of recent fiscal factors on the bond market more obvious.

At present, the overall monetary policy remains sound and neutral, and the operation of the open market is relatively conservative. How will fiscal factors affect the bond market? How will fiscal input affect the money supply? This article will be analyzed.

What are the influence ways of financial factors?

The fiscal shock is mainly caused by the supply of government bonds and fiscal revenue and expenditure:

The main channels of influence of ① on bond market are liquidity effect (changes in fiscal deposits caused by fiscal financing and fiscal revenue and expenditure) and emotional effect (emotional disturbance caused by the increase in the supply of government bonds and primary issuance).

The main channel of influence of ② on generalized liquidity is the increase of M2-derived multiplier effect.

After combing through the historical experience, we can find that:

On the day of the announcement of the issuance of treasury bonds by ①, if the issuance volume increases month-on-month, the yield of 10-year treasury bonds and those issued by China will tend to rise to a certain extent.

② in the month when the supply of government bonds is large, the funds between banks tend to be tight, and the interest rate center of inter-bank pledge repo will have an obvious upward trend.

The month of high increase in ③ expenditure is often the month of upward growth of M2.

How much "emotional shock" will the increase in the supply of government bonds bring?

The "emotional shock" of the increase in the supply of key-term treasury bonds is not obvious, and the average daily impact is about 0.4Bps.As the issuance of key-maturity treasury bonds has a clear date rule, the increase in the issuance of key-maturity treasury bonds will often cause the market to worry about the increase in the supply of government bonds.

Under this expectation effect, when the issuance volume of interest rate bond announcement increases, it will lead to negative expectations in the market; in fact, when the month-on-month increment of issuance volume is not significant, this emotional shock is not obvious. We have counted the announced issuance of key-term treasury bonds since 2019, and compared with the total amount of the previous key-term treasury bonds, we have obtained the month-on-month added value, and observed the changes in the maturity yield of 10-year treasury bonds and Chinese bonds on that day:

On the same day that the supply of ① treasury bonds increased in the past two years, the yield on 10-year treasury bonds rose by an average of 0.42 BPS and the average 10-year bond yield rose by 0.47Bps.

If ② calculates that the issuance volume of treasury bonds has increased by more than 20 billion yuan month-on-month, the average yield of 10-year treasury bonds has risen by about 0.6 BPS. The average yield of 10-year bonds has risen by about 0.9Bps.

As can be seen from the scatter plot, when the month-on-month added value is small, the change of the yield of CDB is basically evenly distributed on both sides of the horizontal axis, indicating that the impact of the increase in fiscal supply on market sentiment is limited. However, when the announced bond issuance increases significantly, the scatter tends to be distributed above the horizontal axis, and the maximum change in yield can reach close to 6Bps (of course, the increase in the supply of treasury bonds may not be the only reason for the change in bond yields).。

The increase in local bond issuance in the second quarter deserves investors' attention.As the second quarter is often the high point of fiscal revenue during the year, and the gap of fiscal revenue is relatively small, the current increment of treasury bond issuance is not obvious, and the increment of single-period issuance of key-term treasury bonds is only 70-10 billion yuan; at the same time, because the maturity of treasury bonds is also relatively large in the near future, the market impact of the recent increment of treasury bonds issuance is not obvious.

Considering that the main contradiction of the current market transaction is not very clear, the increase in the supply of local bonds may cause greater market concern. According to the previous analysis, when the month-on-month increase in issuance is not obvious, the expected effect is not significant, but there is a certain correlation between the announcement issuance volume of interest rate bonds and the changes in yields since the beginning of this year: especially at the end of January and March this year, the trends of the two indicators are basically the same. Therefore, the possible "supply shock" in the second quarter is worthy of investors' vigilance.

How does the supply of government debt affect the interbank capital side?

The increase in net financing of government debt has led to an increase in the price of interbank capital.After the issuance of treasury bonds, financial deposits will be formed, and the contribution funds will be returned to the balance sheet of the central bank in the form of government deposits, and the time lag between the payment of government bonds and the formation of fiscal expenditure will lead to the shortage of funds among banks.

We have sorted out the monthly average of the monthly net financing of government debt and the weighted interest rate of silver pledge repurchase since 2019, and we can see that the "supply increment" since May 2020 has greatly increased the monthly price centers of R001 and R007. The two show a relatively obvious correlation and basically keep pace with the trend. At the same time, due to the convergence of the current monetary policy initiative, the impact of government bond contributions on the total amount of reserves will be more obvious.

Judging from the experience in 2020, when the net financing of government bonds exceeds 600 billion yuan a month, the weighted interest rate center of bank pledge repo may rise by 10-15Bps.This is also a noteworthy point in the second quarter of this year.

Government bonds are expected to have less disruption to the capital side in the second quarter of this year than in the same period last year.From 2019 to 2020, the new debt limits were issued to local governments by the end of December last year, with a scale of hundreds of billions of yuan; however, it was not until March this year that 2.358 trillion yuan of local debt was approved in advance, and the late issuance of local debt led to a sharp decline in local debt issuance in the first quarter compared with the same period. Then the supply of local debt may be more concentrated. However, we think that the financial disturbance caused by the supply of government debt in the second quarter of this year will be less than that of last year.

Although the current overreserve rate of commercial banks is still maintained at a low level, the pattern of inter-bank liquidity this year is different from that of last year: the stock market has cooled recently, and the "fund-absorbing" effect of equity management institutions has weakened. As a result, more customer reserves have been transferred from stock funds to other types of asset management products. At the same time, taking into account the recent net financing of all kinds of bonds is not high, some customer reserves have precipitated into non-silver deposits. As the current total amount of non-bank deposits is relatively high, although the current bank overreserve rate is relatively low (the overreserve rate may be around 1.2% Murray 1.3% at the end of March), the reserve funds of non-bank institutions are relatively sufficient, making the capital surface relatively stable.

From the actual situation of interbank lending, the financing of non-bank institutions has indeed increased; in this context, the impact of government debt supply on capital prices may be smaller in the second quarter, and the subsequent redemption of equity funds is also worthy of attention.

How does fiscal revenue and expenditure affect broad liquidity?

How fiscal revenue and expenditure affect broad monetary volume: M2 growth may slow down.The impact of fiscal expenditure on broad money is not only the release of a certain amount of base money, but also has a greater impact on broad liquidity. As China's fiscal expenditure adopts a zero-balance account system, fiscal expenditure will form private sector deposits before the formation of inter-bank excess savings, so:

① government deposit receipts and payments will directly form private sector deposits in the same amount.

The financial revenue and expenditure of ② will directly lead to the change of bank over-deposit, and then affect the total amount of M2 through the multiplier effect.

After taking into account the bank deposits directly created by fiscal deposits, if the cash leakage rate is c and the comprehensive deposit reserve ratio is r, then the "money multiplier" of fiscal investment is 1 / (r+c-rc).

If we use the balance sheet of the central bank to roughly estimate the cash leakage rate c and the average reserve ratio of commercial banks, we can find that the multiplier effect of fiscal input on M2 is about 7.62 times. This ratio is higher than the current full-caliber monetary multiplier of 6.95 times. Therefore, the M2 growth rate will also be higher in months with more fiscal spending.

As the overall fiscal revenue will be "more revenue than expenditure" in the second quarter, fiscal expenditure will create less M2, M2 growth will also be closer to credit growth, and broad money growth is expected to slow.

In the follow-up, the deduction of the inventory cycle during the year can be divided into two stages:

In the first stage, with the repair of production capacity in Europe and the United States, alternative exports tend to fall, the upward slope of exports is expected to slow, and external demand may gradually peak. With the advent of the peak construction season in China and the issuance of superimposed special debts to promote the progress of the project, real estate + infrastructure is expected to continue to work, coupled with COVID-19 's continuous vaccination, domestic consumption is expected to continue to repair, and domestic demand will be compensated in stages. the proportion of domestic demand may rise, at the same time, taking into account the recent continuous increase in environmental production restrictions in some parts of the country, the inventory of end products in the middle reaches and downstream may both fall back.

In the second stage, the impact of broad liquidity tightening on the economy has come to the fore, the constraints of superimposed land investment on real estate investment have gradually emerged, and the margin of infrastructure investment has stabilized after the upward pulse, and the domestic demand side may face certain fluctuations. At this stage, industrial inventory may be replenished again. For the bond market, in the first stage, corresponding to the passive destocking under the favorable demand, the bond market may face the double suppression of high economic prosperity and rising industrial product prices; in the second stage, the logic of generalized liquidity convergence and fundamental decline will be realized one after another, and the downward space of current bond interest rates will also be broader.

Outlook for the future

Outlook for the future:For the bond market, there are three main ways of fiscal factors: emotional effect (emotional disturbance caused by the increase in the supply of government debt and primary issuance), liquidity effect (changes in fiscal deposits caused by fiscal financing and fiscal revenue and expenditure) and broad money (the month of high fiscal expenditure is often also the month of upward M2 growth).

From the perspective of historical experience, the impact of the increase in the supply of treasury bonds on the yield of treasury bonds is not significant, while the tightening of inter-bank funds brought about by the rising net financing of government debt is more noteworthy; however, considering the current pattern of relatively abundant reserves of non-bank institutions, the impact of the rise in government debt supply on the capital side may be relatively moderate.

In addition, considering that the overall fiscal revenue in the second quarter is "more revenue than expenditure", the growth rate of M2 broad money may slow. Overall, considering that there are still some bearish financial factors in the second quarter, the capital side and bond yields may be hit by some time.