Journalists reported that last week (October 7th - October 13th), the issuance of municipal bonds required multiple adjustments to the subscription interest rates in order to be successful. On October 14th, however, municipal bonds were snapped up, with municipal bond ETFs rising by 1.23% at one point in the morning, although they fell back somewhat afterward. Nevertheless, many municipal bonds still saw significant increases, especially some medium and low-rated municipal bonds which saw a considerable decrease in yield.

Several investment institution representatives told 21st Century Economic Report journalists that on October 14th, municipal bonds indeed experienced a buying frenzy, mainly influenced by the debt resolution policy announced by the Ministry of Finance on October 12th. The pressure from redemptions of wealth management products, which previously led to a decline in municipal bonds, has gradually eased. As new debt resolution policies are implemented, the supply of municipal bonds may further decrease, and municipal bonds are expected to see a recovery in spreads.

Advertisement

A significant reversal in the municipal bond market occurred last week, with multiple municipal bonds experiencing multiple adjustments to the subscription interest rates during the issuance process.

An announcement on October 10th revealed that Qingdao West Coast New Area Marine Holding Group Co., Ltd. had to adjust the subscription range three times during the issuance of its fourth medium-term note (scientific and technological innovation note) for 2024, raising the interest rate cap from 3.0% to 4.0%. Ultimately, the issuance was unsuccessful, and the issuer canceled it. According to the company's announcement, the original plan was to issue 300 million yuan worth of notes, but due to significant market fluctuations, the company decided to cancel the issuance.

Additionally, several municipal companies issuing bonds had to raise the subscription interest rates by more than 50 basis points. For instance, Linyi Investment Development Group Co., Ltd., rated AA+, issued the "24 Linyi Investment MTN004" and adjusted the upper limit of the subscription interest rate range twice, from 3.5% to 3.8%, and then to 4.2%. Some newly issued municipal bonds even had a face interest rate as high as 5%.

However, influenced by the reversal in investment sentiment towards municipal bonds this week, the subscription interest rates for municipal bonds issued on October 14th began to decrease. For example, Jingmen High-Tech Industrial Development Co., Ltd., rated AA, announced on October 14th that it would lower the subscription range for its fifth medium-term note of 2024 from 2.5% to 3.5% to 2.3% to 3.5%, reducing the lower limit of the subscription range.

Behind this reversal was the significant increase in municipal bonds on October 14th, especially for medium and low-rated municipal bonds which saw a faster decrease in yield and larger increases. Wind data showed that the Wind High-Yield Municipal Bond Index rose by 0.67% at one point during the day and still closed up by 0.24%. Choice data indicated that the yields of several AA+ and below-rated municipal bonds fell by more than 20 basis points, with some even falling by over 100 basis points. The yields of some high-rated municipal bonds also saw a significant decrease, such as the "24 Jincheng Construction MTN026" with a yield drop of 31.14 basis points.

"The previous decline in municipal bonds was due to the strong equity market, leading to redemptions of wealth management funds, which suddenly reduced demand. Now that the situation with wealth management redemptions has improved, even without the positive impact of the debt resolution policy announced by the Ministry of Finance on October 12th, the yields on municipal bonds should have fallen this week," said an asset management department representative of a certain securities firm in an interview with journalists. In fact, after a wave of declines, municipal bonds had already shown a rebound on October 10th and 11th. The "China Securities Zhongzheng Municipal Bonds 1-3 Years Implicit AA+ and Above" index showed a 0.57% decline from September 26th to October 9th, followed by increases of 0.07% and 0.16% on October 10th and 11th, respectively.

Previously, the significant rise in the stock market attracted many investors to redeem wealth management products to invest in the stock market. Coupled with the decline in the net value of wealth management products, this led to a period of considerable redemption pressure. However, with the stock market cooling down after the National Day holiday, the redemption pressure brought about by the stock market situation has eased.Many interviewees believe that the debt resolution policy announced by the Ministry of Finance on October 12th was the main factor driving the surge in urban investment bonds on October 14th. At the Ministry of Finance press conference on October 12th, Minister Lan Fo'an stated that a one-time increase in debt limits on a large scale is planned to replace the existing implicit debt of local governments and to increase efforts to support local governments in resolving debt risks. The relevant policies will be explained in detail to the public after going through the legal procedures. Lan Fo'an emphasized that this policy is the strongest measure to support debt resolution in recent years, a policy "timely rain," which will greatly reduce the pressure on local governments, allowing more resources to be freed up to support economic development and consolidate the grassroots "three guarantees."

The supply of urban investment bonds may further decrease.

After the bond market experienced a sharp decline before the National Day holiday, the performance of interest rate bonds has become stable, but credit bonds continue to fall. Haitong Asset Management's public account stated in an analysis on October 14th that under the background of debt resolution, the supply of national and local bonds has increased, while the supply of urban investment bonds has contracted. The supply and demand structure of urban investment bonds has further improved, and with the recent redemption pressure, the spread of urban investment bonds has widened, and it is expected that urban investment bonds will see a spread repair.

Driven by a package of debt resolution policies, the supply of urban investment bonds has already significantly decreased. Wind data shows that in the first three quarters of this year, urban investment bonds issued a total of 3.07 trillion yuan, a 20% decrease year-on-year. In the first nine months of this year, net financing was negative for six months, and only positive for three months.

Huachuang Securities research report believes that under the policy support of "replacing the existing implicit debt of local governments with a large-scale debt limit," the pressure to maintain the redemption of local government public bonds will be alleviated, and the risk of urban investment debt will further ease, which is beneficial to urban investment bonds, especially for some weak quality areas that have experienced a redemption wave and have increased valuation and interest pressure.

"Replacing the existing implicit debt of local governments with a large-scale debt limit means that the redemption pressure of local implicit debt has been reduced. As part of the implicit debt, the risk of existing urban investment bonds has been greatly reduced. After the repayment of debts in various places is guaranteed, the spread between urban investment bonds of different quality areas may also narrow." A chief fixed-income analyst of a certain securities company said to the reporter.

"According to the simplest and most direct understanding of the debt resolution policy of the Ministry of Finance's press conference, the spread between urban investment bonds of different quality areas may narrow, which was reflected in the urban investment bond market on October 14th, but the later market is still unclear." The above-mentioned asset management department person of a certain securities company said to the reporter.

It is understood that due to the recovery of the bond market, the net value of bank wealth management has rebounded in recent days, "mainly because both interest rate bonds and credit bonds have rebounded, and the net value of wealth management has also rebounded." The head of fixed income of a certain wealth management company said.

The net value of bond funds has also rebounded significantly. Wind data shows that from October 10th to October 14th, 96.86% of medium and long-term pure bond funds rebounded in net value, achieving positive returns, among which two funds' net value increased by more than 1%. The short-term pure bond funds are even higher, with 98.78% of the funds' net value rebounding.