What does the reduction in deposit interest rates mean?

Core Viewpoints

According to reports from the financial sector, since April, more than 30 banks have lowered their deposit interest rates. This adjustment is essentially a supplementary reduction following the second round of large banks' deposit rate cuts last year, or it may indicate that a new round of deposit listing rate reductions led by large banks is on the way, which also opens up space for further interest rate cuts. Coupled with the performance of the economic fundamentals, expectations for loose monetary policy are heating up.

For bond market investors, it is recommended to pay more attention to the opportunities brought by the narrowing credit spreads due to the reduction in deposit rates. The downward space for interest rate bonds is relatively limited, so it is advisable to maintain some caution and adopt a more defensive barbell strategy. Looking ahead, the downward space for interest rate bonds will need to consider factors such as credit issuance performance, the pace of economic recovery, and changes in the external environment. If the expectations for interest rate cuts materialize, growth-stabilizing policies are strengthened, and Sino-U.S. negotiations are resumed, interest rate bonds may face significant disturbances.

Report Body

1. What Does the Supplementary Reduction in Deposit Rates Mean?

According to reports from the financial sector, since April, more than 30 banks have lowered their deposit interest rates, primarily among small and medium-sized banks, with the adjustment mainly focused on 3-year and 5-year products. After the reduction, the interest rates of most bank deposit products have fallen below 2%. Is this reduction a prelude to a new round of deposit interest rate cuts and LPR cuts? What opportunities can investors pay attention to in the bond market? This article will analyze.

1.1

Expectations for Loose Monetary Policy Heat Up

This adjustment is essentially a supplementary reduction following the second round of large banks' deposit rate cuts last year, or it may indicate that a new round of deposit listing rate reductions led by large banks is on the way. Historically, since 2023, each round of deposit interest rate cuts has been initiated by state-owned large banks, followed by a large number of small and medium-sized banks before starting a new round of adjustments (Table 1).

When large banks lower deposit interest rates, it often coincides with LPR cuts. The five LPR adjustments since 2023 have generally been synchronized with large banks' deposit rate reductions. The reason is that in recent years, banks' net interest margins have been continuously compressed, necessitating simultaneous adjustments to asset and liability interest rates to alleviate banks' profit pressures. Therefore, the expectations for a new round of deposit interest rate cuts by large banks also open up space for further interest rate cuts.

On the other hand, from the perspective of economic fundamentals, the necessity of loose monetary policy has also increased. Currently, some macroeconomic data remains relatively weak: the CPI has been negative for two consecutive months, and the second-hand housing market continues to exhibit characteristics of price-for-volume exchange. Coupled with the uncertainty brought by external tariff policies to our economy, loose monetary policy remains necessary. On April 6, the People's Daily published an article, changing the expression of monetary policy from the previous "timely reduction of reserve requirement ratio and interest rates" (according to the official website of the People's Bank of China) to "policies for reducing reserve requirement ratio and interest rates can be introduced at any time," which further raised expectations for loose monetary policy.

1.2

What opportunities can be focused on in the bond market?

On one hand, at present, the downward space for interest rate bonds may be relatively limited. Specifically:

① The trading market's expectations for interest rate cuts may have been fully priced in. From this week's data, the participation of major trading institutions such as funds and rural financial institutions has decreased, with both net buying and net selling amounts showing a reduction, leading to a situation where interest rates are "unable to move down."

② In terms of allocation, large banks still maintain a tight liability side, and there is uncertainty in bond allocation demand. In March, large banks added liabilities of 3.6 trillion yuan, an increase of 83.2 billion yuan year-on-year, mainly due to the large issuance of interbank certificates of deposit, commercial paper, and other financial bonds. However, deposits, especially interbank deposits, have shown a significant year-on-year decrease, and the return of interbank deposits will still take time. The demand for interest rate bonds is closely related to credit issuance, which carries uncertainty.

③ In addition, we speculate that the Politburo meeting at the end of April may introduce more incremental policies in areas such as real estate and consumption, which will also disturb interest rate bonds.


④ If the interest rate cut is implemented, the subsequent room for chasing gains will be relatively limited, and it may instead become a window for taking profits at this stage. Reviewing the past interest rate cuts in recent years, when the prior interest rate cut trading was relatively sufficient, yields often experienced a rapid pullback after the cut was implemented. Especially in recent years, with the speed of bond market trading and reaction increasing, the window for chasing gains in interest rate bonds has shown a trend of shortening, sometimes only lasting for 1 trading day, or even being fully digested on the day of the interest rate cut. Only when the central bank cuts rates beyond market expectations will yields experience a relatively larger decline, such as in August 2023 and July 2024.

On the other hand, opportunities in credit bonds are relatively more certain. Referring to past rounds of deposit rate cuts, the demand for credit bonds, especially those with 1-3 year maturities, has increased among broad asset management, often leading to a narrowing of the 3-year credit bond spread.

Therefore, overall, it is recommended to pay more attention to the opportunities arising from the narrowing of credit spreads. The downward space for interest rate bonds is relatively limited, and it is advisable to maintain some caution, possibly adopting a more defensive barbell strategy. Looking ahead, the downward space for interest rate bonds will need to consider factors such as credit issuance performance, the pace of economic recovery, and changes in the external environment. If the expectations for interest rate cuts are realized, growth-stabilizing policies are strengthened, and Sino-U.S. negotiations are resumed, interest rate bonds may face significant disturbances.

1. Institutional bond custody volume 3. Institutional fund tracking

3.1

Funding prices

This week, liquidity has tightened slightly. R007 closed at 1.71%, an increase of 1 BP from last week, while DR007 closed at 1.69%, an increase of 4 BP from last week. The 6-month national stock transfer repurchase rate closed at 1.08%, a decrease of 12 BP from last week

3.2

Financing Situation

This week, the balance of interbank pledged reverse repos was CNY 10,777.52 billion, an increase of 0.5% compared to last week. From a broad asset management perspective, this week, fund companies and bank wealth management experienced net financing of -CNY 40.4 billion and -CNY 75.91 billion, respectively. 4. Institutional Behavior Quantitative Tracking

4.1

Assessing Fund Duration

This week, the calculated durations of high-performing interest rate bond funds and general interest rate bond funds were 5.65 and 3.95, respectively, an increase of 0.02 and 0.11 compared to last week. 4.2

"Asset Shortage" Index

4.3

Institutional Trading Signals

(1) Subordinated Debt (2) Ultra-Long Government Bonds (3) 10Y Local Government Bonds 4.4

Institutional Leverage All Known

This week, the overall market leverage ratio is 106.9%, which is basically unchanged from last week. In terms of broad asset management, this week the leverage ratio of insurance institutions recorded 116.5%, a decrease of 0.4 percentage points from last week; the leverage ratio of funds recorded 100.8%, a decrease of 1.1 percentage points from last week; the leverage ratio of securities firms recorded 235.3%, a decrease of 5.0 percentage points from last week.

4.5

Bank Self-Operated Comparison Table

5. Asset Management Product Data Tracking

5.1

Funds

5.2

Bank Wealth Management

This week, the overall market wealth management product net value decline rate is basically unchanged from last week, with an overall product net value decline rate of 2.6%. 6. National Bond Futures Trend Tracking! 7. Broad Asset Management Pattern

Article authors: Jin Yi, Liu Chang, source: Trading Circle, original title: "What Does the Deposit Rate Cut Mean"

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk