Over 100 Billion Yuan in Selloffs! Securities Firms Become Recent Bond Market Short-Selling Force

Why are AI and brokerages leading the 100-billion-yuan bond sell-off?

Cailian Press, March 16 (Editor: Li Xiang) Today, the pressure to sell in the interbank spot bond market continued to intensify in the afternoon, with the yield on active 10-year government bonds accelerating upward. By the close, the yield on the active 10-year government bond 250016 rose by 1.8 basis points to 1.8360%, and the 30-year government bond 2500006 increased by 1.6 basis points to 2.3085%, reaching a new high since the recent rebound. The divergence between long and short-term yields further persisted.

Cailian Press notes that the steepening trend in the bond market has become more evident recently. Data from last week shows short-term interest rates continued to decline, with the 1-year government bond yield falling 0.9 basis points to 1.28%, and the 1-year interbank deposit rate dropping 1.8 basis points to 1.53%. Meanwhile, long-term rates saw significant adjustments, with the 10-year government bond yield rising 3.3 basis points to 1.81%, and the ultra-long 30-year government bond yield jumping 8.5 basis points to 2.37%.

“The differential performance between short and long-term interest rates reflects the trading results driven by different institutional behaviors,” said Yang Yewei, Chief of Guosheng Fixed Income. He explained that the short-term market is mainly driven by allocation portfolios, supported by ample liquidity and declining interbank deposit rates, while the long-term market is influenced by economic fundamentals and imported inflation expectations. Recently, market sentiment has been high, possibly also related to banks and other allocation institutions not fully participating at the end of the quarter.

Industry insiders told Cailian Press that recent increases in short-term bond allocations mainly come from large banks and funds. Last week, major banks net purchased 29.3 billion yuan of 1-year short-term bonds. “Recently, large banks have been actively lending in the interbank market, with daily lending reaching over 5 trillion yuan, helping the DR001 rate stay around a low of 1.3%,” said a fund company. They mainly increased holdings of 1-3 year short-term bonds, with net purchases reaching 13.8 billion yuan.

“Under the recent decline in interbank deposit rates, non-bank institutions like funds and brokerages have been most active. Fund companies have continued to increase holdings of short-term bonds through wealth management and money market funds, with some bond holdings even rising. Based on the implementation of the 2024 interbank deposit self-discipline mechanism, short-term interest rates could even fall below the funding rate,” an industry source said.

Notably, the largest sellers of long-term bonds recently have shifted to brokerage firms.

Industry data shows that securities firms sold nearly 110.1 billion yuan of long-term bonds across all maturities, with key 7-10 year government bonds and policy bank bonds selling 25 billion yuan and 10.8 billion yuan respectively, leading among major institutions. “The concentration of 25-year special bonds in lending increased sharply from 41.7% to 48.02% last week, mainly driven by brokerages. However, the recent surge in oil prices was more of an event shock, so the selling pressure has not persisted,” said the Wind Fixed Income team.

Additionally, changes in the lending volume of brokerages and other non-bank institutions are also noteworthy. According to Li Yishuang, Chief of Huafu Fixed Income, after the 2024 self-discipline regulations were announced, non-bank institutions significantly increased their lending in a generally low-interest-rate environment. However, recent lending volumes have fallen to a one-year low, and the reallocation of cash assets by non-bank institutions warrants attention.

Contrary to the strength in the short end, the rapid rise in long-term interest rates is widely viewed as primarily driven by rising imported inflation expectations and amplified by institutional behavior.

According to Hua Chuang Asset Management, since March, ongoing conflicts between the US and Iran have pushed Brent crude oil prices above $100 per barrel, becoming a key factor breaking the previous pattern of synchronized decline in short and long-term yields. Market expectations for a positive year-on-year PPI and a rapid mid-year increase have also intensified, creating a strong emotional impact on the long-term bond market.

On the institutional trading front, banks and other allocation-oriented institutions face performance assessment pressures at quarter-end, leading to a temporary slowdown in long-bond allocations. Meanwhile, concentrated selling by funds and trading institutions has created a “sentiment shock—institutional reduction—interest rate rise” negative cycle, causing long-term yields to spike rapidly.

However, many industry insiders point out that more data is needed to confirm whether the economic recovery will be sustained. Ultimately, the divergence between short and long-term interest rates will converge, with the key factor being the monetary policy response to inflation.

“Long-term interest rates are likely to converge back toward short-term rates after the quarter-end,” Yang Yewei believes. As banks resume their allocation activities and oil prices are expected to decline, easing inflation concerns, long-term rates may see a recovery.

Qu Rui, an analyst at Dongfang Jincheng, also noted that although the downward expectation for interbank deposit rates will continue to benefit short-term bonds, this week coincides with tax periods, and combined with the shrinking of buyback reverse repos, the space for further liquidity easing is limited. Additionally, since short-term arbitrage opportunities are diminishing, the downward potential for short-term yields will be constrained.