On September 24th, during a press conference held by the State Council Information Office, the central bank launched a multi-pronged approach, with several policies potentially having a significant impact on the bond market: First, it reduced the reserve requirement ratio and policy interest rates, leading to a decline in market benchmark interest rates; second, it lowered the interest rates on existing housing loans and unified the minimum down payment ratio for housing loans.

In terms of reducing the reserve requirement ratio and policy interest rates, the reserve requirement ratio will be lowered by 0.5 percentage points in the near future, providing about 1 trillion yuan in long-term liquidity to the financial market; the central bank's policy interest rate will be reduced, with the 7-day reverse repo operation interest rate lowered by 0.2 percentage points, from the current 1.7% to 1.5%, guiding the loan market报价 interest rate and deposit interest rates to move down in sync, maintaining the stability of commercial banks' net interest margins.

Regarding the reduction of existing housing loan interest rates and the unification of the minimum down payment ratio for housing loans, commercial banks are guided to lower the interest rates on existing housing loans to near the interest rates on newly issued housing loans, with an expected average decrease of 0.5 percentage points. The minimum down payment ratio for housing loans for the first and second homes is unified, with the national minimum down payment ratio for second home loans adjusted from 25% to 15%.

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This year, under the main logic of the fundamentals and "asset scarcity," the bond market has been warmly embraced by investors, with the yield on 10-year government bonds once falling to around 2.0%. So, what is the impact of the monetary policy released by the central bank at the press conference on the bond market? Daily Economic News reporters interviewed several experts for interpretation.

What is the impact of lowering the interest rates on existing housing loans on the bond market?

Many experts interviewed expressed that the impact of lowering the interest rates on existing housing loans on the bond market is not a single-sided bullish or bearish. On the one hand, reducing the interest rates on existing housing loans may be accompanied by a reduction in deposit interest rates, which is conducive to the downward movement of the interest rate curve, thus constituting a bullish for the bond market; on the other hand, lowering the interest rates on existing housing loans may boost consumption and improve the fundamentals, thus having a certain bearish impact on the bond market to a certain extent.

Feng Lin, Director of the Research and Development Department of Orient Gold Honesty, said, "On September 24th, the central bank announced that it would guide commercial banks to lower the interest rates on existing housing loans, with an expected average decrease of 0.5 percentage points. The impact of this move on the bond market is not a single-sided bullish or bearish, and it should be viewed in two ways."

On the one hand, the reduction in the interest rates on existing housing loans, along with the central bank's reduction in policy interest rates, will likely lead to a subsequent reduction in the interest rates on newly issued residential housing loans. This will enhance the attractiveness of bonds, especially long-term and ultra-long-term bonds, to banks from the perspective of the debt-loan pricing effect, which is bullish for the bond market. At the same time, as an important asset for banks, the reduction in the interest rates on existing housing loans will further exacerbate the pressure on the narrowing of banks' net interest margins. Next, the regulatory authorities will alleviate this by guiding commercial banks to orderly reduce deposit interest rates. The reduction in deposit interest rates will intensify the "deposit migration" phenomenon, driving the expansion of wealth management and fund scales, thereby enhancing the strength of bond allocation, which is also bullish for the bond market.

On the other hand, the reduction in the interest rates on existing housing loans sends a positive signal for stabilizing the real estate market. It can also save interest expenses for residents and ease the trend of repaying housing loans in advance, which is conducive to driving the recovery of resident consumption. Therefore, from the perspective of boosting the real estate market and resident consumption and improving the expectations of the fundamentals, the reduction in the interest rates on existing housing loans has a bearish impact on the bond market.Specifically, Lv Pin believes that the adjustment of the existing housing loan interest rates has a downward pulling effect of 20 basis points on ultra-long-term bonds in the logic of asset pricing; a reserve requirement ratio (RRR) cut can lead to a reduction in the currently high short-term and certificate of deposit (CD) interest rates. "Looking at the current price points, the impact on the short end is greater than the long end, and the curve from 20 to 30 years is relatively flat, possibly overpriced."

Xing Jun, on the other hand, believes that guiding financial institutions to optimize their layout, hone their internal skills, and actively respond to the narrowing of net interest margins and interest rate risk is an important task of current financial regulation. RRR cuts and interest rate reductions will increase the money supply in the market and lower the cost of funds, providing more financial support for the bond market, which helps to increase the activity of the bond market and push up bond prices.

At the same time, he also stated, "In an environment where interest rates continue to fall, it is not ruled out that investors' demand for bonds will further increase, further reducing the yield levels of bonds."

The yield on the 10-year government bond is expected to drop to 2%.

It is worth mentioning that this is not the first time that housing loan interest rates have been reduced recently. On August 31, 2023, the central bank issued the "Notice on Matters Related to Reducing the Interest Rates of Existing First Home Loans," after which various banks issued announcements to adjust the interest rates of existing housing loans. According to a research report by Tianfeng Securities, after the media disclosed last year that state-owned large banks would hold a project launch meeting for adjusting the interest rates of existing housing loans, bond market interest rates fell to some extent.

The Tianfeng Fixed Income team led by Sun Binbin believes that before and after the reduction of existing housing loan interest rates in August 2023, combined with multiple factors such as funds and government bond supply, it can be seen in retrospect that the impact of reducing existing housing loan interest rates on the bond market may be limited.

As for the potential benefits of the current market's focus on reducing existing housing loan interest rates combined with interest rate cuts for the bond market, the team believes that it still needs to be considered in conjunction with the central bank's normalized supervision and curve management.

Before the press conference that day, the secondary bond market had already priced in the expectations of RRR cuts and interest rate reductions, as well as the reduction of existing housing loan interest rates, so the bond market's reaction to this round of policy may be relatively limited. However, industry insiders believe that there is still a certain room for maneuver in the bond market.

"Different institutional investors in the bond market in September have been trading to varying degrees on the adjustment of existing housing loan interest rates and RRR cuts, which may be a bullish realization for the bond market. There is still room for maneuver, but there may be some fluctuations and rebounds, and the new trend and logic may need to wait until October," Lv Pin said.

Li Yong told the reporter that since September, the yield on the active 10-year government bond has dropped by about 10 basis points, which has priced in part of the expectations for RRR cuts and interest rate reductions. However, there was a divergence of views on the reduction of existing housing loan interest rates, mainly considering the pressure on banks' net interest margins.In 2023, there was a reduction in the interest rates for existing housing loans, with an average decrease of 73 basis points, bringing the adjusted weighted average interest rate down to 4.27%. In contrast, the weighted average interest rate for new personal housing loans issued in the second quarter of 2024 was 3.45%, still leaving a gap of 82 basis points. If there were a one-time reduction of 80 basis points, it is expected to affect the banks' net interest margin by about 10 basis points. The press conference indicated that a preliminary reduction of around 50 basis points would be more appropriate, with a gradual reduction being the better approach, said Li Yong.

Li Yong believes that after adjusting the interest rates for existing housing loans, to address the issue of banks' net interest margins, there will be a subsequent reduction in the interest rates on bank liabilities, specifically deposits. This part is newly confirmed information from this press conference. There is still room for maneuver in the secondary bond market, and the yield on 10-year government bonds is expected to fall to 2%.

Additionally, the central bank's "multi-pronged" approach has exceeded market expectations, and some voices in the market suggest that the potential for further positive developments may have been exhausted.

Li Yong analyzed that the positives for the bond market come from the fundamentals, policy, and the "asset scarcity" in the secondary market. At present, these factors have not completely reversed, so there is no need to be overly wary of the positives being exhausted. "The policies introduced by the central bank at the press conference are also aimed at the current weak fundamental environment. We need to observe whether the fundamentals can recover subsequently. In terms of policy, the focus is still on monetary policy, maintaining a loose liquidity environment. On the fiscal side, it is about implementing the previously confirmed bond issuance quotas and using reserve requirement ratio cuts to support this, with the loose monetary cycle continuing to support the bond market."