Weekly Strategies Report : New Capital Regulations will result in flattened upper shift of interbank interest rate
The rate bonds moves within a narrow range: we believe that the rate bonds have a low tradability with a lower holding period return than the credit bond in view of slightly milder economy and expectation of moderate and controllable inflation. The HPR of the 10Y bonds falls in the scope between 3.5-3.6% while that of the non-CDB policy financial bond falls between 4.2-4.3%, which has basically reflected the expectation of 3% around of inflation for the next year. It will fluctuate in the narrow scope of 20BP. In case of any unexpected factors, such as stimulation of economy still relying on investment of fixed assets or the inflation exceeding the upper limit (we always believe in this possibility), the rate bonds will be the worst affected by it. Therefore, the interest rate bonds only bear configuration and liquidity management values, and we recommend to shorten their duration to 3-5 years.
New Capital Regulations will result in flattened upper shift of interbank interest rate: (1) The new Capital Regulations will promote upper shift of the interest rate in a period within 4 months, especially the period between 3-4 months. The capital interest rate in a period of more than 4 months will not be promoted. According to the required capital adequacy ratio of 9.5% for the systemically important bank in the transition year 2013, we estimate that the New Capital Regulations will promote upper shift of interbank interest rate. It will rise by 34BP for a period within 3 months, by 43BP for a period between 3-4 months, and by 14BP for a period of more than 4 months. (2) According to the New Capital Regulations, if risk rated ratio of the pledge-style repo is 0, it will not be included in the risk asset. As the risk rated ratio of the pledge-style repo is 0 in general, the Shibor for a period within 4 months and the spread of the pledge-style repo rate will be enlarged in the New Capital Regulations.
The capital cost is under rising pressure before the New Year and the Spring Festival: The R007, 14-DAY REVERSE REPURCHASE and the offered rate begin to rise significantly from the first day of the last 13 days before the end of the year. The cost of 1-day funds begins to rise from first day of the last 8 days before the end of the year; the cost of 14-day funds begins to rise from first day of the last 13 days before the end of the year; the cost of 7-day funds begins to rise from first day of the last 7 days before the end of the year; the cost of 1-day funds begins to rise on the last day of the year and the day of the issue. If nothing unexpected happens, the FR014 began to rise from last week. It is expected that the FR007 will also rise significantly. If nothing unexpected happens, the FR014 began to rise from last week. It is expected that the FR007 will also rise significantly. It is Chinese New Year on February 10 this year. It is expected that the cost of funds will rise significantly in the 7-10 trading day before February 10.
In the operations of open market last week, with respect to money supply, the People’s Bank of China (PBC) had 26 billion CNY bills to mature, with reverse repurchase of 168 billion CNY and fixed treasury deposit of 40 billion CNY; with respect to money withdrawal, the reverse repurchase of 102 billion CNY was to mature and the accumulated net money of 132 billion CNY was supplied on open market throughout last week, and PBC provided a significant net money supply last week as the end of the year approached. PBC maintained the issuance interest rate of reverse repurchase.
Continual low investment on the primary market last week: Totally 55.24 billion CNY consisting of 22.24 billion CNY ADB loan and 30 billion CNY CDB loan was released, and increased by 1.31 billion CNY with respect to that in its previous week. Circulation volume last week is in the middle position of the year.
Slightly weakening secondary market for interest rate on debt: The yield curve of interest rate on debt moved upward last week due to insufficient money. National debts’ 1-year, 7 -year and 10 -year yield amplitude rise by 3BP; 1-year national debts go up to 6BP, 2- to 10-year-term CDB bonds respectively go up to 2BP and 5BP; non-CDB policy financial bonds with various maturities respectively go up to 3BP-7BP.