Bonds Mar 13

CCDC issues Feb 2020 bond market risk report  

Daily cash transactions down 43% from previous quarter 

CCDC issues Feb 2020 bond market risk report  
China's Central Depository and Clearing Co Ltd said the overall volatility of the bond market is high. It noted new defaults in February, including some linked to the Founder Group. File pic by Xinhua.

(ATF) – China Central Depository & Clearing Co Ltd (CCDC) is the main Central Securities Depository in China's interbank bond market. It is the safe-keeper of 61 trillion yuan of bonds, an 85% share of the market, including 100% of China's sovereign and quasi-sovereign bonds.

The CCDC has released its overall report for China’s bond market in February, notably when Covid-19 was peaking in China.

In February 2020, the bond index – ChinaBond's new comprehensive net price index – rose 0.88% to 101.86 points, while ChinaBond's treasury bond net price index rose 1.34% to 121.43 points, and ChinaBond's credit bond net price index rose 0.55% to 95.61 points. 

The T-bond yield curve as a whole fell, with the one-year Treasury bond rate falling by 25bp to 1.93%, and the 10-year treasury bond rate fell by 26bp to 2.74%. Treasury futures prices rose, and the 10-year treasury futures active contract settlement price rose 1.41% to 101.01.

The CCDC says the overall volatility of the bond market is high. ChinaBond's net price index showed 1-year treasury yield and 10-year treasury interest rate volatility are at a historical 95%, 60%, and 95% quantiles, respectively. 

During the month, the price fluctuated greatly on the first day after the China Spring Festival holiday (February 3). The interest rate on the 10-year treasury bond under the influence of the Covid-19 epidemic fell 17bp from before the holiday. Other impact events include the expansion of the CPI increase in the middle of the month and the spread of the epidemic overseas at the end of the month.

New defaults

The monthly rate of credit bond defaults rose in February. Some 26 new defaults or rollover bonds, worth a total of over 40 billion yuan, increased the size of defaults or bond rollovers among corporate credit bonds including corporate bonds, medium-term notes, short-term financing bonds, directional instruments, asset-backed securities, convertible bonds, and exchangeable bonds. There was an increase of 0.15 percentage points month-on-month, mainly due to the restructuring of Founder Group, and its remaining 23 bonds worth 34.54 billion yuan are all considered in default.

Three new defaults or extensions were added in the month – Kangmei Pharmaceutical, Sander Engineering and Yuangao Industrial. In addition to the default or extension of bonds, there were 16 16.63 billion yuan of outstanding bonds payments.

In terms of industrial bonds, the 5-year AA-grade industrial bond-treasury bond spread was 144bp, down by 5bp month-on-month, and the 5-year AA-grade industrial bond spread was 112bp, which was an increase of 1bp. In terms of urban investment bonds, the 5-year AA-grade urban investment bond-treasury bond spread was 103bp, which was down by 20bp, and the 5-year AA-grade urban investment bond-China Development Bond spread was 71bp, which was down by 15bp.

Corporate credit bond qualifications have risen overall. At the end of February, the average implicit rating scores of the existing company's credit bonds – corresponding to a rating level of 5 points for levels AAA+, AAA, AAA-, AA+, AA-, A+, A, A-, BBB+, BBB, BB, B, CCC, CC, C (denoting 100 points, 95 points and down to 25 points respectively) – led to a score of 83.90, which was an increase of 0.21 month-on-month. And the average score of China's continued corporate bonds was 84.69, an increase of 0.13 month-on-month, while the average score of non-state-owned enterprise continued debt was 77.35, a month-on-month increase of 0.79. The average score of Chinese corporate bond issuance was 86.94, which was an increase of 0.36 from the previous month. MoM increased by 1.01.

Daily cash transaction volume down

Liquidity in the cash market has declined. The February bond market trading volume was approximately 9.65 trillion yuan, and the average daily cash transaction volume was approximately 482.325 billion yuan, down 43.55% from the previous quarter. 

The CCDC says money market liquidity remains abundant. February 7-day benchmark repo rate (BR007)  is a benchmark for repo market rates compiled and issued by CCDC, and is calculated based on pledged repo transactions pledged by interest rate bonds throughout the market, the weighted median of transaction rates. The benchmark repo rate includes two varieties overnight and seven days, expressed as BR001 and BR007 respectively. They were an average 2.29%, lower than last month's average of 15bp, BR007 reached a high of 2.61%, which was lower than the high of January.

The overall level of liquidity stratification is stable, with small and medium-sized banks in February (small and medium banks include other commercial banks and credit unions), were flat month-on-month.

The total size of the bond market continues to grow. At the end of February 2020, the total amount of bond market custody included interbank certificates of deposit and bonds issued by the CCDC, Shanghai Clearing House, and China Securities. Sina Finance reported a total of about 99.98 trillion yuan, an increase of 0.60 trillion yuan from the previous month. The scale grew by 13.80% year-on-year, an increase of 0.06 percentage points from the previous month.

Unincorporated products, overseas institutions, and securities companies mainly increase their holdings of bonds [only counting interbank market bonds hosted by CCDC]. The holdings of bonds by insurance institutions, securities companies, unincorporated products, and overseas institutions increased by 0.21%, 5.73%, 0.57%, and 3.48%, respectively, while the holdings of commercial banks and credit union bonds decreased by 0.33% and 1.63%, respectively.