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According to Industrial Securities, the monetary policy report for Q1 2025 shows that the central bank's "leash" is in the process of being loosened, and the downward space for the yield curve may open up.

Zhitong Finance ·  May 11 07:50

Industrial Securities advises investors to extend the duration, raise leverage, and prepare for the window period of declining yields.

According to the Zhithong Finance APP, Industrial Securities released a Research Report stating that the Q1 2025 Monetary Policy Report shows that the focus of the central bank's monetary policy has shifted to stabilizing growth, and the probability of a similar adjustment risk in the bond market as in the first quarter is low. Objectively, the bond market also faces the issue of narrow capital gain space. Subsequently, if the bank observes a new round of deposit listing rate reductions, or if the central bank resumes government bond purchase operations, then the space for the yield curve to decline may open up. Currently, the bullish sentiment in the bond market has not been fully realized, and the overall cautious market sentiment presents a favorable opportunity for positive positioning. It is recommended that investors extend their duration, raise leverage, and prepare for the yield decline window period.

The main points from Industrial Securities are as follows:

The wording of the Q1 2025 monetary policy report is not much different from that of Q4 2024.

However, from the few changes that exist, the shift in the central bank's attitude is still clearly visible. In the next stage, the main line of the bond market running may be "increased external pressure → priority on stabilizing growth → reduction in money market rates and deposit rates → downward shift of bond yield curve." In Q1 2025, there are two significant changes in the central bank's use of monetary policy tools: first, on January 10, the announcement to suspend government bond purchase operations, and second, on March 24, changing the MLF operation to a fixed quantity, interest rate tender, with multiple price bid.

Regarding the operations of buying and selling government bonds.

The central bank clarified that this is a "temporary suspension," and it will "resume operations at an opportune time depending on market supply and demand conditions." The current suspension of government bond purchases actually reduces the interest rate risk of holding government bonds, and if interest rates rise significantly thereafter, the central bank is likely to restart government bond purchase operations for macro-prudential purposes.

Regarding the reform of MLF operations.

The central bank has clarified that MLF will exit the policy interest rate attribute and revert to a liquidity injection tool. Currently, the central bank has formed a reasonable distribution of liquidity injection tools across different terms, and the term structure of liquidity injection is also an important representation of the monetary policy stance. On May 7, the central bank announced a reserve requirement ratio cut and launched new structural tools, which extended the term of liquidity injection and, combined with price-based tools, guided a decline in money market interest rates, signaling a significant trend towards a looser monetary policy stance.

The Q1 monetary policy report for 2025 broke away from the conventional four-column format to include six columns, with columns 4 to 6 providing more incremental information for policy assessment.

Column 4 emphasizes "strengthening investors' interest rate risk management," indicating that future macro-prudential measures will still have a significant impact on the implementation of monetary policy and the running of the Bonds market. Column 5 points out that the Chinese government's debt is backed by assets, and there is still substantial room for future fiscal policy efforts, with monetary policy actively cooperating with expansionary fiscal measures. Column 6 highlights the contradiction of strong supply and weak demand in China's real economy, indicating that future monetary policy will likely focus on supporting effective demand, particularly in consumer spending, especially in the service sector. This shift in thinking suggests that even if stimulus policies are intensified, the probability of a significant rise in real financing demand is low.

Risk warning: unexpected monetary policy, unexpected fiscal policy, geopolitical risks, fluctuations in institutional liabilities.

The translation is provided by third-party software.


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