The July LPR quote was released, with both 1-year and 5-year LPR 'cuts' by 10 basis points.

On Monday, July 22, the People's Bank of China authorized the National Interbank Funding Center to announce that the loan market quoted interest rate (LPR) for July 22, 2024 is: 1-year LPR at 3.35%, and LPR of 5 years or more at 3.85%, both down 10 basis points from the previous value. Previously, LPR has remained unchanged for four consecutive months.

The central bank stated that, in order to strengthen expectation management, and to promote better connection between LPR publication time and the financial market running time, starting from July 22, 2024, the LPR publication time will be adjusted from 9:15 am on the 20th of each month (extended to holidays) to 9:00 am.

On the same day, the central bank announced that the 7-day reverse repo operation in the open market would be adjusted to a fixed interest rate and a quantity tender. The operation interest rate will be adjusted from 1.80% to 1.70%. At fixed rate and quantity tender, a 58.2 billion yuan reverse repo operation was conducted on Monday; previously it was conducted at interest rate tender.

In order to increase the scale of tradable bonds and relieve pressure on the bond market's supply and demand, institutions participating in medium-term lending facilities (MLF) that have demand for selling middle and long-term bonds can apply for phased reduction of MLF collateral starting this month.

After the announcement was released, offshore RMB against the dollar fell in the short term, falling below 7.2900, and the yields of 10-year national bonds, national development bonds, and long-term national bonds active coupons in China all fell.

Previously, a SWHY report pointed out that there was strong reform of the LPR mechanism and down expectations: On the one hand, it focused on whether LPR would be decoupled from MLF and connected to OMO, in order to complete the policy interest rate reform and focus more on short-term policy interest rates. On the other hand, considering that current credit demand is significantly weaker, from July to August, which is also a mid-year window for steady growth, although the central bank continues to focus on long-term debt risks, the necessity of lowering LPR remains strong.

If the LPR quote is lowered this time, the institution is expected to drive the bond market yield to a stage of rapid decline. Considering that the central bank's tolerance for rapid decline in the long-term bond yield is relatively low, it is not ruled out that the central bank will adjust the long-term bond yield by borrowing and reselling national bonds, which is expected to significantly amplify the volatility of the long-term bond yield.

Citict Sec research reports pointed out that the LPR quote mechanism may be improved with reference to overseas experience and recent policy statements, thereby enhancing policy efficiency and marketization. In the short term, the LPR quote is expected to be lowered, creating more suitable policy conditions for the recovery in crediting.

Huachuang fixed income expressed that the LPR and MLF premium spread may be relatively high, and there may be room for some compression. Currently, the LPR and 1-year MLF premium spread is at a historically high level of 95 basis points. Under the background of diluting the mid-term policy rate center of MLF, policy rates cannot be maintained, and the possibility of LPR quote cuts to compress the premium above MLF cannot be ruled out. During the recent acceleration phase of the monetary policy framework reform, the focus is on the possibility of lowering the 1-year LPR and gradually decoupling MLF.

For the bond market, if adjusted, it is expected that the disturbance of “broad credit” or relative disturbance may be limited. Currently, the expectations for residents and corporate sectors are weak. If LPR is lowered alone, it may also have limited boost on the expectation of “broad credit”. In addition, from the perspective of comparative effect, it may form certain advantages for the bond market.

Edited by Jeffrey