Expectations for economic recovery heat up! The key interest rate curve in the market ends its "inversion"

China's interest rate swap curve ends seven months of inversion, with investors expecting the latest stimulus measures to revive the economy.

Wind data shows that the spread between China's 5-year and 1-year interest rate swaps (IRS) turned positive last Friday. On Tuesday, the 5-year interest rate swap rose to around 1.56%, and the spread between the 5-year and 1-year interest rate swaps further widened to about 5 basis points, the largest since December last year. The spread was once inverted by more than 15 basis points in February this year.

(Source: Wind)

After turning positive, the spread between the 5-year and 1-year offshore non-deliverable interest rate swaps (NDIRS) expanded to 4 basis points on Tuesday, the largest since November last year.

A series of data released earlier suggested that the Chinese economy is recovering: data from the National Bureau of Statistics shows that China's GDP grew by 5.3% year-on-year in the first half of the year, with overall economic operations remaining stable. The social financing and new RMB loan data for June also exceeded expectations.

With policies continuously reinforcing the "anti-involution" direction, emphasizing comprehensive governance of low-price disorderly competition and overcapacity issues, as well as the commencement of the Yarlung Tsangpo River hydropower project, investors have more imagination about China gradually getting rid of the low-price state. The current normalization of the curve marks an important shift in investors' judgment on the long-term trend of the Chinese economy, with expectations for monetary easing transitioning to policy normalization.

Xu Yongbin, co-chief investment officer of YouShan Fund, stated that the long-term economy is expected to improve, and market expectations are leading the way. (The end of the curve inversion) may be the first step in investors' expectation adjustments.

Xing Zhaopeng, a strategist at ANZ Bank, believes that under multiple favorable catalysts, traders are betting on higher interest rate swaps. The rise in long-term rates may continue, and the steepening of the interest rate swap curve has just begun.

It is worth noting that while the overall interest rate swap curve is normalizing, the 2-year variety remains relatively low. Data shows that although the inversion degree of the spread between the 2-year and 1-year interest rate swaps has continued to narrow since the second quarter, it is still negative at present.

In this regard, Xu Yongbin believes that the entire interest rate swap curve is basically flat, which means the market believes that the entire rate cut cycle may be nearing its end, and there may only be a maximum of 20 basis points of rate cuts left in the second half of the year or the remaining time of the rate cut cycle.

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