Bond market overdraws gloomy economic expectation, risky for going long

(XINHUAFINANCE)Underthecurrentsituationwherethemarketwidelybelievesthatthebullishbondmarketwillcontinue,toreasonablycooldownthebondmarketmaypromoteitsrationaldevelopment.

DengHaiqing,chiefeconomistwithJZSecuritiesCo.,Ltd.,releasedaresearchreportonJan.2,whichsaidthatthebondmarkethasdeviatedfromeconomicfundamentalsasitisovervalued.Thebullishbondmarketbroughtbyassetsshortageinthesecondhalfof2015isunsustainable.Todate,highyieldofthebondmarkethasseriouslyoverdrawnpessimisticexpectationforeconomicoutlook.Investorsareadvisedtowithdrawfromthemarketasearlyaspossible,incasethattheroutofstockmarketin2015repeatsagaininthebondmarket.

Coincidently,GaoZhanjun,managingdirectorofCiticSecuritiesCompanyLimited(600030.SH;06030.HK),pointedoutinanarticlehewroteattheendof2015thattherearealreadysignsofbubbleinthebondmarket.Gaojudgedthebubbleonthefollowingbasis:thescaleofcashbondtradingandmargintradingincreasedsharply,yieldreducedsignificantlyandcreditspreadnarrowedrapidly,allatthesametime,andmeanwhile,hugeamountofcapitalsflowedin.

FromDec.14toDec.28lastyear,thebondmarkethadseenthemostsignificantgainsattheyearend.Theyieldsof10-yearTreasurybondand10-yearChinaDevelopmentBank(CDB)bondsdropped23basispointsand29basispointsrespectivelyfrom3.0306percentand3.3964percentto2.7961percentand3.1073percent.

AtraderwithapublicfundinShanghaitoldthereporterthatthethenmarketshowsatendencyofirrationallytakinglongpositionsoffloatingratebonds.Itmighthavetodowiththedeclinedissuanceattheendoftheyear,whichledtomismatchofsupplyanddemand.“Capitalscanonlybuyonsecondarymarket,hencethereareimpactsfollowingtheincreaseofsupply.”

AfteradiponDec.28,theyieldof10-yearTreasurybondreboundswiftly,upnearly10basispointsinfivetradingdays.“ThecapitalinflowinthemiddleofDecemberwasofhugeamount,whichwatchedcloselyonthecentralbank’sinterestratecut,butfailed;inthepastfewdays,policybankslikeAgriculturalDevelopmentBank(ADB)increasedfinancialbondsandthemarkethencewasimpacted.Highlyconsensusexpectationoverthemarketisalsoariskshouldbepaidattentionto,”saidtheaforesaidtrader.

Logicbehindthebondmarketbubble

Recently,marketparticipantshavedifferentopinionsonbondmarketbubble.Supportersofbubbleargumentbelievethatinterestratesofsomerealestatedebtsarecomparablewithpolicyfinancialbondsnow.Leverageratioofsomeindividualinstitutionistoohigh,andbubbleemerged;opponentsthinkthatleverageratioofthewholebondmarketisnotthathigh,andinvestorsdon’thavetoconcernaboutbubble.

ButintheviewofGaoZhanjun,thestatementthat“leverageratiooftheoverallbondmarketisnothigh”isitselfanambiguity.

InlateDecember2015,Gaowroteanarticle,whichpointedoutthattheleverageratioofthebondmarketatthebeginningoftheyearis1.081times,andnothasmuchdifferencewithcurrent1.109times.InNovember2015,theleverageratiois1.37times,thoughmuchhigherthantheinterbankratioof1.09times,itisstillanaverageofrecentyears,andsignificantlydeclinedincomparisonwith1.45timesatthebeginningoftheyear.Buttheindicatorofleverageratiocouldsometimesleaveoutkeyinformation.“Becausethecustodyamountofbondsisfarmorethanfinancingbalanceandthetwousuallychangealot.”Therefore,therisksonthebondmarketshouldbeanalyzedfromnewperspectives.

Gaoindicatedthatthescaleofcashbondandmargintradingincreasedsharply,yieldreducedsignificantlyandcreditspreadnarrowedrapidly,allatthesametime,andmeanwhile,hugeamountofcapitalsflowedin,arecriteriathatcouldbeusedtojudgewhetherthereisbubbleonthebondmarket.

Gao’sstatisticsshowthatcashbondtradinghasbeenactivesince2015.“inthefirstelevenmonths,interbankcashbondtradingvolumehadreached80trillionyuan,farmorethanthehistorichighof73.8trillionyuanin2012,anddoubledincomparisonwiththatof2014”;meanwhile,thesizeofmargintradingexplode.“Averageinterbankdailybuybacktransactionsincreasedfrom1trillionatthebeginningoftheyearto2.8trillionyuaninDecember,andthepercentageofovernightbuy-backexceeded90percent.”Itshowsthatthemarketisconfidentaboutcontinuousinflowofmoney

What’smore,theyieldofbondsreducedsignificantly.TheTreasurybondyieldcurvemovedown60to70basispointsevenly.Yieldsofcorporatebondsdeclinedmore.“Theyieldofbondshasalreadyathistoriclow,andthecreditspreadhasnarrowedtotheminimumintervalsince2008.”

Therefore,hebelievesthatifeasemonetarypolicyin2016failstomeettheexpectation,bondissuanceandsupplypressureincreasesandcreditrisksspread,theremaybemassivesell-offs.“Thoughthethreepotentialfactorsmaynottakeeffect,butareworthnotingof”.

DengHaiqing,however,directlypointsoutthatthereisbubbleinthebondmarket.Hebelievesthattheprimaryfactorleadingtobullishbondmarketisoverpessimisticeconomicexpectationandassetsshortage.Currently,theyieldofthebondmarkethasrisentoohighandisnotconsistentwithpessimisticeconomicexpectation.Supposetheeconomyandinflationdownturnin2016isinsignificant,thebondmarketwillfacegreatpressureonadjustment.

InDeng’sopinion,China’sGDPgrowthrateisexpectedtostabilizeat7percentin2016,anditisprobablethatinflationwillincreaseagain.Theprimarylogicis,trulyproactivefiscalpolicieswilltakeeffect,namely,increasingfiscaldeficit,taxcut,stimulatingrealestate,stabilizinginvestment.Suchpolicieswillreversecyclicaleconomicdownturn,supplementinventoryandformexportgrowthimpetuses.