In response to the sudden new crown epidemic, global central banks have mostly responded with loose monetary policies, and global asset prices are all bubbles in varying degrees. The Fed, which is equivalent to the global central bank, staged a crazy scene in financial history. In order to promote economic recovery, the Fed used a variety of tools to provide sufficient liquidity to reduce financing costs. The direct consequence of this was the expansion of the Fed’s balance sheet.
The Fed’s assets exceed 8 trillion
Just this month, the Fed’s balance sheet exceeded $8 trillion for the first time, setting a record high. The latest data shows that the total assets of US depository institutions reached 8.11 trillion US dollars, nearly twice that of the beginning of 2020, which means that since the outbreak of the new crown epidemic in March last year, the Fed’s balance sheet has nearly doubled. Looking back at the 2008 financial crisis, the Fed’s assets were less than US$900 billion at that time, and this figure currently exceeds US$8.11 trillion. It can be seen from the chart that following the financial crisis in 2018, the total assets of the Fed’s depository institutions will once again show a nearly linear increase in 2020.
With such a rapid and large-scale release of water, the yields of US Treasury bonds have naturally fallen sharply. The U.S. 10-year Treasury bond yield is the benchmark for global financial asset pricing. It is related to the pricing of U.S. stocks and even emerging market securities. After hitting a record low in 2020, the rebound will begin. The rapid unilateral rise in 2021 means the continued growth of the U.S. economy. recovery.
US Treasury Bonds: Half of the top ten “creditors” are reducing their holdings
China’s share of holdings hit a record low in nearly 10 years
Holding U.S. Treasury bonds is a win-win situation. According to the Securities Times and Databao statistics, as of March 2021, foreign investors hold 7.03 trillion U.S. Treasury bonds, accounting for 25% of the total issuance, an increase of 6 from the beginning of 2000. percentage point. Japan, China, and the United Kingdom have long occupied the position of the world’s top three creditors in the number of U.S. debt held, and they hold nearly 40% of U.S. debt (relative to foreign investors’ holdings of U.S. debt). Among them, China and Japan have always held U.S. debt. Compete in the world’s first and second position.
Issuance of bonds is the same as printing money, both for the purpose of diverting the country’s financial and debt crises. Affected by the epidemic and under the downward pressure of the global economy, the speed of global debt issuance has increased significantly. In February 2020, the total US Treasury bonds reached 23.41 trillion U.S. dollars, of which foreign holdings of U.S. Treasury bonds reached 7.23 trillion U.S. dollars, a record high.
However, recent data show that foreign holdings of U.S. Treasury bonds accounted for a downward trend in the total issuance ratio, which shows that foreign investors are reducing their holdings of U.S. Treasury bonds. Among the countries that it holds, China’s share of U.S. Treasury bonds has declined the most. In July 2011, it held a record high of 9.17% in U.S. Treasury bonds. Currently, it holds only 3.91% of U.S. Treasury bonds, a reduction of more than 5 percentage points; Japan has reduced its holdings over the same period Holds 1.76 percentage points. During the epidemic, China reduced its holdings of US Treasury bonds by more than 30 billion for five consecutive months from June to October 2020, and Japan has increased its holdings over the same period.
On June 15, US time, the latest International Capital Flow Report (TIC) released by the US Treasury Department shows that in April 2021, half of the top ten “creditors” of overseas US debt are reducing their holdings.
“Going Global” of Chinese Bonds: Increased International Discourse Power
With the rise of the renminbi’s international status, U.S. debt seems to be “disliked.” Since China’s bonds formally “goed out” in 2007, foreign investors’ interest in holding Chinese bonds has also risen sharply, with China’s national debt accounting for a quarter of the world’s total. Data treasure statistics show that foreign investors hold RMB 3.26 trillion of RMB bonds, which is more than three times higher than in June 2017. Regardless of the exchange rate, foreign investors’ net purchases of Chinese bonds were 370 billion yuan in 2019, a year-on-year decrease of 30.57% compared to 2018, and the net purchases of US bonds by overseas investors dropped by more than 50% year-on-year. With large-scale holdings, transactions are also very active. In 2020, the size of foreign investors’ net purchases and sales of Chinese bonds increased by more than 150% year-on-year, while the size of net purchases of U.S. bonds increased by less than 65% year-on-year.
Judging from the transactions of foreign institutional investors in the inter-bank bond market, the annual spot bond transaction volume in 2019 reached 5.3 trillion yuan, and the transaction volume from January to May 2021 was only slightly lower than the annual level of 2019, exceeding 46,000 100 million; the net sales in the first five months of this year is more than 60% of that of the entire year of 2019.
Splurge on credibility: Issuing a large bond to transfer risks does not work
The Fed unrestrainedly flooded the water and passed on the crisis to the world, but the routine operation will inevitably be seen through. The sell-off wave mentioned above is the best proof. After lending money to the United States, these countries will be more passive, but do not buy bonds, and import and export trade may be negatively affected.
Under over-issued currency, bond yields usually fall, so the attractiveness also needs to be considered. Analysts pointed out that despite the volatility of the economy, low interest rates have prompted global companies to issue large bonds. Banks in the euro zone, especially those in peripheral countries, use the ultra-low yield environment to issue large amounts of bonds to meet regulatory requirements to increase capital buffers. Demand.
While overseas countries are still suffering from the “occupation” of the new crown epidemic, nearly 20 countries around the world have reduced their holdings of U.S. debt, and the hedging efforts of U.S. debt and U.S. stocks have dropped significantly. Data treasure statistics show that since 2020, all listed U.S. stocks accounted for 40% of decliners, while the proportion of A-shares that fell during the same period was basically the same as that of U.S. stocks. The white horse stocks in the A-share market performed super well, but U.S. stocks were almost beheaded. It is twice that of A shares. Although large-scale debt issuance is not a direct cause of stock price fluctuations, it is an indirect consequence of squandering credibility because of “no bottom line”.
Where is the future of the bond market? After the China Statistics Bureau announced the May PPI data (up 9% year-on-year), the domestic 10-year active bond yields showed a downward trend. Judging from the trend of the 10-year Treasury bond yield in the first quarter, it shows a different trend from the PPI, indicating that the current impact of inflation on the domestic bond market is limited. But some people concerned said that although the US economic data is good, the loose monetary policy will not be changed in the short term. If the US continues to release water, the credit of US debt will inevitably be hit.
To what extent is China’s capital market affected?
Rising interest rates will obviously greatly reduce the discounted value of the company’s cash flow, especially for the stocks of growth technology companies that have not yet achieved stable profits. Data treasure statistics show that in the past six years, the correlation between US 10-year Treasury yields and China’s 10-year Treasury yields has reached 0.61, reflecting the significance of US 10-year Treasury yields as an anchor for global asset returns. The Chinese economy was the first to recover from the new crown epidemic. Therefore, the monetary policy was tightened earlier than overseas, and the domestic interest rate level was relatively stable. In the short term, fluctuations in the U.S. 10-year Treasury bond yield did not have a significant impact on the domestic interest rate level. In one year, the correlation coefficient of 10-year Treasury bond yields between China and the United States fell to 0.45.
China Merchants Securities believes that the current analysis of U.S. policy lies in finances rather than currencies. According to the current situation, it is estimated that the above-mentioned shocks on both ends of supply and demand will end in June. No matter when the Fed starts to reduce QE, the U.S. funds are most accommodating. In the past, the U.S. dollar index and U.S. Treasury yields are expected to launch an upward offensive at any time, and the pressure on the devaluation of the renminbi and capital outflow will increase accordingly, which will have a negative impact on domestic assets, especially risk assets. The liquidity contraction of the US dollar may also impact the performance of equity assets in emerging markets.
Data in the past year shows that the correlation between the yield of the US 10-year Treasury bond and the S&P 500 is as high as 0.92, which is enough to show that the monetary policy has a profound impact on the US stock market and further affects the valuation of the global stock market. Recent data shows that the volatility of US Treasury bond yields has been much higher than that of China’s Treasury bond yields, while the volatility of A-shares is still greater than that of US stocks.
Zhongtai Securities believes that the market will repeat its liquidity expectations in the second half of the year, and there may be more than expected or lower than expected. Therefore, in the second half of the year, the volatility of the equity market will increase, and the market is still structural, and β opportunities are not easy to grasp. It is recommended to pay more attention to α (that is, the market is more suitable for bottom-up selection of individual stocks in the second half of the year).
Global capital is eyeing China: core assets are favored
Under the new changes in the global landscape, the A-share market has become a “safe haven”, and the white horse stocks and core assets have become the darlings of global capital. Data treasure statistics show that the A-share market takes into account the 99 shares of White Horse stocks and core asset attributes. The total market value is close to 25 trillion, and the value of each stock market exceeds 10 billion.
In terms of market performance, there are 15 stocks with a cumulative increase of more than 10 times in the past 10 years (less than 10 years of calculation since the listing), including Yiwei Lithium Energy, Longji shares, Muyuan shares, etc.; stocks that have increased by more than 100% account for more than 80% , Only three companies’ share prices fell, including Foxconn, Guotai Junan Securities and Postal Savings Bank of China.
In terms of foreign shareholding, 29 companies including Bank of Ningbo, China Pacific Insurance, and Pengding Holdings acquired QFII positions in the latest quarter, and Longi, Qiaqia Foods, Livzon Group, etc., which gained positions compared with the previous year’s end of last year, were Masuquing.
The agency is also very optimistic about the future performance of 99 shares. From 2021 to 2023, the agency forecasts that the net profit growth rate is expected to exceed 20%. There are 22 core asset stocks. Yiwei Lithium Energy, China Freedom, Joyson Electronics and other stocks all include Among them, 6 stocks including Longji, Shanxi Fenjiu and Luzhou Laojiao have been rated by more than 30 institutions.