Finance Association, May 8 (Editor Yang Bin) In the first 4 months of this year, the scale of local bond issuance and net financing was much lower than the same period last year. The market generally expects the issuance of special bonds to accelerate. The estimated issuance of local bonds in May-June is close to 1.7 trillion yuan. The issuance of a superimposed trillion-dollar special treasury bond may be completed in May, and the peak supply of government bonds will arrive.

Industry insiders believe that it is difficult to change the current “asset shortage” in the bond market due to institutional mismatch and the peak supply of government bonds. If the central bank releases liquidity to cooperate with the issuance of government bonds, then the impact on government bond supply is manageable.

In April, the net financing of local bonds was only over 50 billion yuan, and the issuance of new special bonds was slow

According to Finance Association statistics, local bonds were issued 343,910 billion yuan in April this year, and repaid 288.979 billion yuan. The net financing amount was only 54.931 billion yuan. The monthly net financing amount shrank further. The first three months of this year were 258.643 billion yuan, 413.242 billion yuan, and 278.037 billion yuan, respectively.

Figure: Monthly issuance and repayment of local bonds this year

(Source: Choice data, compiled by the Financial Federation)

In the first four months of this year, the total amount of local bonds issued was 1.92 trillion yuan, achieving net financing of 1.01 trillion yuan. In comparison, the local bond issuance scale reached 2.78 trillion yuan in the same period in 2023, achieving net financing of 1.99 trillion yuan.

The pace of local bond issuance in 2024 was slow. Zheng Zixun, head of fixed income at Haitong Securities, pointed out that the level of local bond issuance and net financing in April 2024 was relatively conservative in the same period of four years, and the scale of issuance and net financing in the first four months was only slightly higher than in 2021.

According to statistics from Xiao Yu, head of fixed income between China and Thailand, the local bond issuance structure in April was mainly refinancing special bonds and general refinancing bonds. Of the 343.9 billion local bonds issued in the same month, refinancing bonds were 210.4 billion yuan.

However, the slow supply of local bonds is mainly hampered by delays in issuing new special bonds. In 2024, a new local government special debt limit of 3.9 trillion yuan was added. As of April 30, the country had issued 72,448 billion yuan of local special bonds, accounting for 18.52% of the national special debt limit. Meanwhile, in the first 4 months of 2023, the country issued 1.62 trillion yuan of local special bonds, accounting for 42.67% of the 2023 national special bond limit.

As for the reason why the issuance of new special bonds has been delayed over and over again this year, a senior fixed income analyst told the Financial Federation that, on the one hand, the review period is getting stricter and the review time is getting longer; on the other hand, after issuing an additional trillion yuan treasury bonds in the fourth quarter of last year, the urgency of issuing new special bonds in the first quarter of this year has decreased.

The supply of government bonds is about to expand. Whether the impact will occur depends on central bank operations

On April 23, the Development and Reform Commission announced that it had completed the screening of the 2024 local government special bond project together with the Ministry of Finance, laying a solid project foundation for the issuance and use of 3.9 trillion yuan of special bonds this year.

The Development and Reform Commission said that the next step is to supervise and guide all localities to strictly grasp project quality requirements, effectively speed up the progress of project construction and use of funds, promote the formation of physical workload as soon as possible, and actively expand effective investment. The April 30 Politburo meeting also mentioned the need to “speed up the issuance and use of special bonds and maintain the necessary intensity of fiscal expenditure.”

Judging from the latest issuance plan, May-June will see a peak in the supply of local bonds and special bonds. Local bonds are expected to be issued at nearly $1.7 trillion. According to Xiao Yu's data, local bonds are expected to be issued 898 billion yuan in May, of which 490.6 billion yuan of special bonds will be added; in June, local bonds are expected to be issued 795.6 billion yuan, of which 469.9 billion yuan will be added. If all of the issuance plans are completed, the issuance progress of new special bonds can reach 43% at the end of the second quarter.

Furthermore, there are many calls for the issuance of trillions of special treasury bonds to be implemented in May-June. On April 22, the Ministry of Finance directed that the issuance of ultra-long-term special treasury bonds will be initiated in a timely manner according to the allocation of ultra-long-term special treasury bond projects. It also coordinates the issuance of general treasury bonds and special treasury bonds, rationally arranges the pace of issuance, and effectively guarantees the funding requirements for special treasury bond projects.

As regulations in April continuously mentioned that long-term bond yields were too low, compounded by expectations that the supply of government bonds would soon expand, the bond market underwent a major adjustment in late April, and the 10-year treasury bond yield rose from a minimum of 2.2150% to 2.3800%. The market is generally concerned about whether the previous “asset shortage” will be reversed when the supply of local bonds, special treasury bonds, etc. is increased.

The FICC chief of CITIC Securities clearly believes that the current trend of institutional underallocation is difficult to change, and that it is not difficult to absorb incremental supply. If the increase in trading activity of agricultural commercial banks becomes the norm, the competition for credit between major banks is not over, and the increase in agricultural commercial banks' preferences for long-term assets will also be the general trend. In the bond market pullback at the end of April, the agricultural and commercial bank's intention to allocate strongly indicated the 30-year treasury bond interest rate point of 2.5% or more or its agreed point.

Financial management, on the other hand, benefited from deposit interest rate cuts and the ban on manual interest rate compensation. The scale surged by more than 2 trillion dollars in April, providing strong support for short-term interest rates and credit spreads, and greatly improving the cost performance ratio of long-term bonds and ultra-long bonds. In the context of interest rate cuts on deposits, the cost performance ratio of insurance products is even more prominent. Premium income is growing steadily, agreed assets are scarce, and increasing insurance allocations in the bond market are also a general trend.

The senior fixed income analyst mentioned above said that in the month before the 2020 special treasury bond was issued, the central bank invested 570 billion yuan in liquidity through reverse repurchases and MLF net investment in the open market. The Politburo meeting stated “flexible use of policy tools such as interest rates and deposit reserves”. If the central bank releases liquidity in cooperation with the issuance of government bonds, then the impact on government bond supply is manageable.

They also clearly believe that the key to influencing the bond market is the central bank's operating pace. Looking at the long-term interest rate risk warning from the central bank in April 4, interest rates on 30-year treasury bonds are all below 2.465%, and may have reached their point of agreement. If special treasury bonds are implemented, policies such as downgrading, reverse repurchase, and MLF volume can be expected.