alert! How likely is the Fed to raise interest rates heavily, triggering a global crisis? How do these countries bear the brunt of the bond market shock?
Recently, with the changes in the international situation and epidemic control, an unprecedented inflation is sweeping overseas markets.
The crisis of high inflation overseas is gradually transmitted to the financial market, and a global bond market shock is being staged.
"When I first came, the oil price was 1.2 pounds a liter, and now it's close to 2 pounds. A tank of oil for a large-displacement car can now cost more than 100 pounds." Xiao Liu, who settled in a small town near Liverpool, England a year ago, told brokerage China Reporter, "The price of daily necessities is obviously rising, even sunflower oil and metal cans are also rising."
Xiaoqiu, who has lived in Germany for many years, also felt the power of inflation.
"Each dish in the restaurant is 0.5 to 1 euro more expensive. My house rent is expected to increase by 50 euros per month for water and heating, an increase of about 20%. In Germany, water, electricity and heating are more refunded and less compensation, and the money is calculated at the end of the year, so I don't know yet. How much will energy go up?"
Against the backdrop of inflationary pressure in many places, the Federal Reserve took the lead in raising interest rates, triggering a chain reaction in the global bond market.
On June 15, the European Central Bank suddenly decided to hold a special meeting to discuss how to deal with the recent surge in the yields of government bonds in many euro zone countries.
On the same day, Japan's 10-year government bond futures plummeted during the session, and the Bank of Japan announced that it would purchase unlimited Japanese government bond futures delivery bonds on the 16th and 17th.
In the early morning of June 16, the Federal Reserve continued to announce that it would continue to raise interest rates, raising interest rates to a range of 1.50 to 1.75%, a rate hike of 75 basis points, the first time since November 1994.
Will the Fed's series of tightening policies put many bond markets around the world into crisis?
What is the impact on the domestic bond market?
The Fed's "most eagle" moment, the global bond market is under pressure
The U.S. inflation data for May showed that the U.S. final demand PPI increased by 10.7% year-on-year on a seasonally adjusted basis in May, and the commodity PPI increased by 16.4% year-on-year on a seasonally adjusted basis.
The CPI rose to 8.6% year-on-year in the month, setting a new high since December 1981 and hitting a 40-year high, reinforcing the market's expectation that the Fed will continue to aggressively raise interest rates.
"Inflation is worse than the Fed expected, and it also shakes the market's confidence in the Fed's ability to control inflation, which is not good for the global bond market." Lubrizol Fund (Chip) Vice President of Investment, Lubrizol China Fixed Income Director Ru Ping said.
The Fed's strong policy tightening has far-reaching implications for global bond markets.
Zhu Chaoping, a global market strategist at JPMorgan Asset Management, said that in addition to the Federal Reserve, central banks in the United Kingdom, Europe and some Asia-Pacific regions are also under pressure from inflation and interest rate hikes. Global bond market volatility has intensified, and they will continue to face upward pressure on yields in the near future.
Specifically, last week, the yield on the 10-year U.S. Treasury bond rose to an 11-year high of 3.47%, and the yield on the two-year Treasury bond hit a 15-year high of 3.44%. One of the tides.
Reuters said on June 13 that anticipation of an aggressive interest rate hike policy, combined with higher-than-expected inflation data, heightened investor concerns about the U.S. economic outlook and corporate solvency.
ETFs tracking investment-grade and high-yield bonds tumbled, while the cost of insuring against potential defaults rose sharply in a clear risk-off mood.
In Europe, the "pumping" effect of the Fed's interest rate hike is also very obvious, and the "sell-off" of bonds has made Italy, Spain, Greece and other heavily indebted countries feel the pressure.
Last week, the interest rate on Italian 10-year government bonds exceeded the "death line" of 4%. Tao Dong, chief economic analyst for Credit Suisse Asia, believes that at this level of bond issuance costs, the financial burden may not be sustainable.
Under the "double kill" of inflation and interest rate hikes, there have been many remarks worried that the European debt crisis will repeat.
"It reminds me of 2012," said Gilles Moec, chief economist at AXA Investment Management in France.
In the Asia-Pacific, the Japanese market was also affected by this round of interest rate hikes.
On June 15, Japan's 10-year government bond futures plummeted by 2.01 yen during the session, the largest one-day drop since 2013, triggering the circuit breaker mechanism of the Osaka Exchange twice.
On June 17, the Bank of Japan announced that it still retains the policy setting of controlling the yield curve and purchasing assets, and maintaining interest rates at negative levels.
In the global wave of interest rate hikes, whether Japan's "ultra-loose" policy is still sustainable has also sparked heated discussions in the market.
The risk of recession in Europe is worse than the debt crisis, and Japan's "ultra-loose" policy is expected to be unsustainable
In response to the market's discussion on whether the European debt crisis will repeat, Zhu Chaoping believes that the prospect of raising interest rates will put a lot of pressure on European heavily indebted countries, and the Italian government bond yield has exceeded the high point at the end of 2018.
The European Central Bank is currently facing a dilemma between inflation and weak economic growth, and needs to study new tools to rescue high-debt countries.
“Progress on this front is still slow, leading to the possibility that interest rates on government bonds such as Italy may continue to climb. As risks mount, the ECB may adjust its quantitative easing tool to provide support. This may avoid a sharp decline in the bond market in the short term, but it is not conducive to rapid decline. Keeping inflation in check makes the economic adjustment in Europe longer."
Ru Ping's answer is more direct, "Europe's problems are more serious than the United States, and it is more affected by the military conflict between Russia and Ukraine. Stagflation is a foregone conclusion, and it is the risk of economic recession rather than debt crisis."
In response to the question of whether Japan's "ultra-loose" policy is sustainable, Ru Ping said that Japan is of course also affected by global inflation, but it is better than Europe by the impact of geopolitical wars.
"Although it is also greatly impacted by high oil prices, the yen is also an undervalued currency, and the Bank of Japan follows the trend of raising interest rates."
Zhu Chaoping believes that due to rising interest rates in overseas markets, investors began to expect the Bank of Japan to abandon its yield curve control target, leading to a sell-off in the Japanese government bond market.
As Japan's inflation level remains in a low range, the Bank of Japan announced that it will continue to maintain its accommodative policy.
This could lead to further depreciation of the yen and higher import costs, pushing up inflation in Japan.
Therefore, the Bank of Japan may be forced to raise interest rates in the second half of the year.
The possibility of a global crisis is low, and the US interest rate hike will hit these three countries
The collective shock of bond markets in many countries around the world has made people worry about whether the chain reaction of this round of interest rate hikes will cause a global bond market crisis.
For this question, Ru Ping believes that a global bond market crisis will not happen.
"Long-term inflation is a silent solution to high debt, and the central bank has no shortage of means to deal with inflation. Deflation is the enemy of high debt, and it is difficult to get rid of negative interest rates."
Zhu Chaoping also has a similar view. He believes that the global bond market is facing greater adjustment pressure in the short term, but the possibility of a global crisis is low.
On the one hand, the U.S. economy is still expected to maintain growth this year, providing a certain buffer for credit bonds, and the market will not experience an extreme situation where credit spreads exceed 1,000 basis points in early 2020.
On the other hand, according to the interest rate hike roadmap given by the Federal Reserve, interest rate cuts may begin in 2024 after rising interest rates from 2022 to 2023.
That, combined with investor fears of a recession, could boost the appeal of long-dated bonds later this year.
Zhu Chaoping said that after the market has experienced a decline, investors can achieve a risk-return balance at a higher yield level, and it is unlikely that there will be a situation similar to indiscriminate selling in 2008 or early 2020.
Some institutions also believe that the main impact of this round of forced interest rate hikes will be import-dependent, high-debt or single-economy countries.
Caitong Fund analysis said that the current round of US interest rate hikes mainly impacted the following types of countries:
First, countries such as Japan are highly dependent on imports of resources and raw materials.
Second, countries with weak economic growth and relatively fragile financial strength, such as Italy, Spain, and Greece.
The third is Turkey and some Latin American countries with high foreign debt and relatively single economic structure.
The direct manifestation will be in terms of debt cost shocks and rolling pressures.
Domestic monetary policy is "mainly based on me", with limited impact on ChinaBond
So, how much impact will overseas high inflation and bond market shocks have on the domestic bond market?
In the face of the Fed raising interest rates sharply, how should domestic monetary policy respond?
The fixed income team of Xingyin Fund believes that this will affect the country mainly in two aspects: First, foreign capital outflows. Since the Fed began to tighten monetary policy in February this year, the net outflow of foreign institutions in the Chinese bond market is about 1,000 yuan per month. The second is emotional disturbance, the market may raise concerns about domestic monetary policy constraints due to overseas interest rate hikes.
However, regarding the actual impact of these two points, the fixed income team of Xingyin Fund stated that, on the one hand, the proportion of foreign debt held by foreign investors is relatively small, and the current allocation pressure of domestic institutions is relatively large, and the supply and demand pattern of the bond market has not changed significantly; On the one hand, my country's monetary policy is still "me-based", and overseas factors have relatively limited impact on the domestic bond market.
"Under the Fed's monetary tightening cycle, China's monetary easing will be subject to certain restrictions, and the probability of interest rate cuts will decrease, but my country's monetary policy is still 'me-based' as a whole. In the current environment of domestic economic growth pressure, liquidity It is still expected to continue easing, and overseas interest rate hikes have relatively limited impact on my country's interest rates." said Cheng Yao, bond fund manager of Cathay Pacific Fund.
In addition, Caitong Fund pointed out that although the debt inversion between China and the United States is currently large, the economic, financial and policy cycles of China and the United States are different in this round. As a result, it is not uncommon for the yields of Chinese and American bonds to invert. The expected impact of the Fed's imposed interest rate hike on the domestic bond market is mostly emotional, and the price of Chinese government bonds is more determined by internal economic fundamentals and policies.
Unlike overseas situations where high inflation is being dealt with by raising interest rates, my country’s current economic fundamentals are in a stage of weak recovery, domestic inflation pressures are moderate, and they are facing economic growth pressures due to weakening demand, as well as a potential rise in unemployment near the graduation season. .
Xingyin Fund expects that under the goal of stabilizing growth and ensuring employment, the central bank will maintain the independence of monetary policy, or continue to be stable and loose.
The long-short game is fierce, and the domestic bond market is also under pressure
In fact, since late May, the domestic bond market has also entered a volatile downward range, but different from the huge shock of the overseas bond market affected by inflation, the reasons for the correction of the domestic bond market are mainly due to the improvement of the epidemic situation and the improvement of economic fundamentals; and At the same time, the slowdown in external demand may also disrupt the effect of China's growth-stabilizing policies. The strength of economic recovery and the pace of exit from monetary easing are highly uncertain, making the bond market long-short game fierce.
On June 10, the National Bureau of Statistics announced that the domestic CPI in May rose by 2.1% year-on-year, and it is expected to rise by 2.2%. 2,790 billion yuan, expected to be 2,030 billion yuan, and the previous value of 910.2 billion yuan. The social financing data has improved significantly, exceeding market expectations.
The improvement in economic fundamentals has led to obvious signs of upward trend in bond yields. As of June 10, the maturity yields of 10-year government bonds and 1-year government bonds were 2.77% and 2.01%, respectively, compared with the low of May 27. 2.71% and 1.91% have increased by about 6 basis points (BP) and 10BP respectively; the yields to maturity of 10-year CDB bonds and 1-year CDB bonds are 2.98% and 2.04%, respectively, compared with the low point at the end of May They increased by about 5BP and 9BP respectively.
The fixed income team of Xingyin Fund believes that the decline in the overseas bond market is mainly due to the rising inflation caused by the conflict between Russia and Ukraine and the decline in the employment participation rate. In contrast, the current inflation risk is relatively small in China. , the reason for the recent correction in the bond market is mainly due to the contradiction between changes in fundamentals and liquidity expectations and the current market status quo.
Specifically, first, the domestic epidemic has been basically brought under control in early June this year. The comprehensive unblocking and resumption of work and production in Shanghai continue to advance. The economic growth rate is expected to stabilize at a low level, but the recovery strength still needs to be observed through high-frequency data.
Second, with the recovery of market financing demand, coupled with the substantial tightening of overseas monetary policy, it has caused potential constraints on domestic monetary policy. Investors expect that the current relatively loose liquidity environment may be unsustainable.
Looking forward to the second half of the year, Cheng Yao believes that the main contradiction in the domestic bond market will lie in the pace and intensity of domestic economic recovery and the pace of exit from monetary easing.
She expects that with the gradual recovery of the economy and the return of funds to neutrality, the bullish factors in the bond market are gradually fading, and there will be upward pressure on interest rates; The pace of sexual reversal will also be slower than in the second half of 2020. Considering that the economic recovery is weak and the risk of monetary tightening is small, the room for corresponding interest rate adjustments is relatively limited.
Caitong Fund believes that with the improvement of the domestic epidemic, the improvement of the economy, and the high growth rate of social financing under the overweight of credit liberalization, coupled with the tightening of external monetary policies, the domestic bond market will be mainly adjusted in the third quarter.
For the domestic bond market, the positives are still lackluster, and the negatives are mainly due to the continued intensive relaxation of the real estate policy, the continued efforts to ease credit and the uncertainty of the loose monetary policy. Bond market transactions are still suppressed by the ease of credit, and the volatility is weak.
How to deal with the bond market shock?
Institutions operate cautiously
It is undeniable that overseas high inflation, rapidly shrinking liquidity, and slowing economic momentum are increasing the vulnerability of the global financial system. In the face of global market shocks, how should bond investment respond?
Where should asset allocation go?
Overseas, the expectation of a recession has sharply increased the risk of bond defaults. The Bloomberg U.S. Corporate High Yield Index shows that as of June 16, the spread between lower-quality U.S. junk-rated corporate bonds and U.S. Treasury bonds has risen to 508 basis points , which is above 500 basis points for the first time since November 2020, and higher spreads mean higher defaults.
Amid this market concern, investors began to flee bond funds.
According to data from financial data provider EPFR, in the week ended June 15, as much as $6.6 billion was withdrawn from U.S. junk-rated high-yield bond funds, and outflows from investment-grade bond funds reached $2.1 billion, a record high. Largest weekly outflow since April 2021.
UBS suggests that investors who currently hold stocks and high-yield bonds can consider deploying more resilient investment-grade bonds, and are optimistic about AA or A-grade investment-grade bonds, especially those issued by companies that have maintained good operating performance during economic downturns. bonds, such as companies less affected by slower global growth.
"In the current situation of persistently high inflation, investors can earn a yield to maturity, and even if interest rates rise sharply, investment-grade bonds may still outperform riskier stocks or bonds," UBS said.
Zhu Chaoping pointed out that in the second half of the year, it is necessary to comprehensively consider the rate of increase in yields and the rhythm of economic slowdown. If the yield rate rises rapidly and the downward pressure on the economy increases, especially when the unemployment rate in the United States is on the rise, you can consider gradually buying into long-term treasury bonds and investment grade credit bonds.
In addition, high-grade Chinese dollar bonds and Asian dollar interest rate bonds with higher yields can also provide better returns after risk compensation.
Domestically, although the current bond market has not experienced huge fluctuations compared with overseas, and is only in a weak and volatile trend, fund managers generally hold a more cautious view.
A fixed income + fund manager in Shanghai told reporters that as the domestic market's stable growth policy in the second half of the year came into effect, and wide credit was strengthened to the real economy, the bond market yields were easy to rise and hard to fall, and the overall opportunity for the bond part was not large, and the price-performance ratio was not high.
According to him, while increasing his equity position, he slightly reduced his bond position. At present, his investment portfolio maintains a short-duration allocation, mainly short-term bonds with a maturity of less than one year. The main investment goal is to obtain stable coupon income.
"In the second half of the year, the bond market investment will focus on defensive operations, shorten the duration, base on short-term bond coupons, and flexibly seize opportunities in long-term and mid-end bonds. It is necessary to pay special attention to safety and liquidity." Great Wall Fund Fixed Income Investment Department General manager and fund manager Zou Deli also expressed similar views.
Caitong Fund concluded that the probability of the bond market turning bears in the short term is not large, but the downside space is limited, and the market outlook may not support long-term strategies.
Among them, the short-term is supported by low capital prices and asset shortages, and is expected to remain low; the long-term downside is limited, and the core issue that restricts the long-term yield is still the pricing of the expected degree of improvement in the near-end of the epidemic and weak fundamentals. With steady growth, economic recovery is certain, and the long-term pricing core will return to broad credit and fundamental expectations and actual trends.
There are also fund managers who suggest focusing on some short-term trading opportunities.
For example, Cheng Yao said that he will focus on the allocation strategy of credit bonds in the second half of the year, and he can pay attention to the trading opportunities after the overshoot of interest rates; Li Jincan, manager of the Harvest Ultra-short-term debt fund, also said that since late May, there have been some negative factors. Cashing in one after another, pushing the yield up to a point close to 2.8%, the bond market may have certain trading opportunities from the second half of June to July, and you can pay attention.
From the perspective of relative asset allocation, Zhao Yaoting, a global market strategist at Invesco Asia Pacific (excluding Japan), said frankly that the base scenario expectations lead us to reduce risks, slightly prefer stocks, and invest in stocks, fixed income and alternative investments widely and diversifiedly. Smart move.
(Broker China)