On July 12, the People's Bank of China recently announced that it will carry out treasury bond borrowing operations for some primary dealers in the near future, and its treasury bond selling operations are being implemented.

As the central bank continues to advance the process of selling treasury bonds, the trend of treasury bond interest rates has attracted more and more attention. So how to understand the central bank's bond purchases, and where will the long-term bond interest rate go?

It has a positive effect on the balance of funds in the bond market

From the perspective of policy positioning, the central bank's treasury bond trading is positioned as a base money delivery channel and liquidity management tool, and it is by no means intended to engage in quantitative easing. Quantitative easing (QE) in advanced economies is when their central banks are forced to buy government bonds on a large scale to inject liquidity to stimulate economic growth when normal monetary policy space is exhausted. However, at present, China's monetary policy still has sufficient space, and the fiscal situation is healthy and sustainable, and there is no need to implement QE.

From the perspective of market impact, borrowing and selling treasury bonds can help balance market supply and demand and prevent bond market risks. At present, the central bank has signed agreements with a number of financial institutions to borrow treasury bonds in an indefinite term and credit mode, and will increase the scale of borrowing according to market conditions in the future, and sell them at the right time to balance market supply and demand. The central bank is very determined to maintain a normal upward yield curve and correct the risks in the bond market.

At the same time, carrying out the operation of selling treasury bonds is also conducive to balancing the problem of time misalignment between supply and demand. The central bank has always said that the operation of buying and selling treasury bonds is a two-way street, with both buying and selling. In the short term, the central bank may be mainly engaged in selling operations, which is related to the recent decline in Treasury yields, and the central bank may borrow Treasury bonds and then sell them in the secondary market to maintain a normal yield curve.

It helps to improve the accuracy of open market operations

The central bank recently announced the launch of a temporary forward and reverse repo operation, which has attracted much attention from the market. Industry experts believe that the temporary forward and reverse repo operations will help strengthen the coordination and cooperation between policy instruments, not only to avoid short-term capital accumulation, but also to prevent financial market risks, and also have a positive effect on the balance of funds in the bond market.

Compared with the normalized liquidity management tool, this tool is conducive to further improving the flexibility and accuracy of open market operations. When the market liquidity is saturated, the excess liquidity of commercial banks is recovered through temporary repurchase operations to maintain the balance between supply and demand of market funds; When liquidity may be tight in the centralized clearing of funds, the temporary reverse repurchase operation can meet the liquidity needs of commercial banks, maintain the smooth flow of payment and clearing, and ensure the safety of liquidity.

Some market analysts also said that this move is conducive to further improving the market-oriented interest rate control mechanism, better guiding the short-end interest rate to run smoothly around the policy interest rate center, and strengthening the policy of the 7-day reverse repo rate.

In the future, the central bank will focus more on regulating short-term interest rates

As for the direction of future interest rate control, Pan Gongsheng pointed out for the first time at the Lujiazui Forum that the central bank will clearly take the short-term operating interest rate as the main policy interest rate. It is worth noting that at present, China has a short-end policy interest rate, that is, the open market operation interest rate, which is similar to the international one, and the central banks of developed economies are mainly targeting short-end interest rates; At the same time, there is also a mid-end policy interest rate in China, which is mainly related to the imperfect interest rate transmission mechanism at that time.

With the continuous improvement of the marketization level of interest rates and the gradual improvement of the interest rate transmission mechanism, there is no longer much need for two policy interest rates, and the central bank should mainly control short-term interest rates. Usually, after the central bank adjusts the short-end operating interest rate, the market will spontaneously increase the points to form the medium- and long-term interest rate on this basis.

The central bank needs to have a target interest rate to measure whether the short-term interest rate control has reached the target. Central banks in advanced economies mainly focus on overnight interest rates, for example, the Fed's effective federal funds rate and the ECB's ESTR are both overnight interest rate indexes.

At present, the central bank is mainly focusing on the interbank 7-day repo rate (DR007), but it is also increasingly looking at the overnight repo rate DR001. Overnight repo transactions account for a higher proportion and are more representative, and can also be considered in this direction in the future.

Improved Loan Prime Rate (LPR)

At present, the LPR is quoted by 20 quoting banks on a monthly basis according to their loan interest rates for the best quality loan customers, according to the principle of marketization, and the quotation rate is obtained by the arithmetic average of the National Interbank Funding Center, and the medium-term lending facility (MLF) interest rate has a certain reference role in LPR pricing, but it is not fully linked.

At present, there is a certain deviation between the LPR quotation and the loan interest rate of the best quality customers, and it is necessary to strengthen the evaluation of the quotation quality in the future to reduce the deviation. Consideration could also be given to using a short-end market rate similar to SOFR as a benchmark for pricing floating lending rates, drawing on international experience. This improvement is conducive to improving the fairness of the benchmark interest rate of loans and the efficiency of interest rate transmission.