Last week, the equity market experienced a high-level retreat, and the yield on interest rate bonds fell slightly. The impact of redemptions on credit bonds also gradually eased on Thursday and Friday. The overall trading of major asset classes was in line with the most likely scenario we proposed in our last weekly review - fiscal policy was basically in line with expectations, and both stock and bond markets made corrections to the more extreme expectations before and during the National Day holiday.

The inflation data for September released last weekend was still below expectations, and real estate transactions increased in volume. However, from some high-frequency confidence indicators, it was evident that there was a significant rise and fall. Overall, the bottom of inflation and fundamentals may not have arrived yet. However, from the market performance and discussions, the current market trading main line is still focused on policy expectations, and there may be a period of neglect for fundamental data.

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On Saturday, the Ministry of Finance held a press conference, covering measures such as debt resolution, major bank capital increases, and stable real estate, with an overall positive stance. This is a continuation of the current round of comprehensive economic stabilization policies. Due to the large variance in market expectations, we can only roughly judge that the content of this meeting may be in line with institutional expectations and slightly below individual investor expectations. It is difficult to judge the short-term impact on stocks and bonds, but in the medium term, the impact of the comprehensive policy on market expectations and fundamentals is in the process of transitioning from quantitative to qualitative changes. Opportunities in stocks and convertible bonds in the future are worth focusing on.

Specifically for the bond market, overall, we judge that the press conference held by the Ministry of Finance on Saturday may have a neutral impact on interest rate bonds and may be beneficial for credit bonds, especially urban investment bonds. The specific analysis is as follows:

The conference attached importance to local debt issues, and the positive tone of debt resolution was set. It proposed to increase the debt limit by a large scale in one go to replace the existing implicit local government debt, which is the most supportive measure for debt resolution in recent years. As a "policy timely rain," it will greatly reduce the pressure of local debt resolution and free up more resources for economic development. Under the positive debt resolution measures, the pressure of local government debt will be reduced, the restrictions on leverage will be relaxed, the pressure of urban investment implicit debt will be alleviated, and credit risk will be further mitigated.

The use of special bonds has been expanded, increasing the financial support for urban investment. It is proposed to allow special bonds to be used for land reserves (including the recovery of existing land or the addition of new reserves) and to support the use of special bonds to purchase existing commercial housing. There are many land reserve and commercial housing projects in the financial statements of urban investment. The use of special bonds for the recovery of land reserves and commercial housing is beneficial for the recovery of funds by urban investment entities. The expansion of the scope of special bond capital and the fields of investment is also conducive to the implementation of projects by urban investment. Benefiting from this, the sources of funds for urban investment debt repayment have increased, which is conducive to reducing risks.

In addition to the above-mentioned statements at the press conference, against the backdrop of encouraging the market-oriented transformation of urban investment and delisting, the supply of urban investment bond supply is still relatively tight. Under the policy guidance of subsequent local debt opening limits to resolve implicit debt, it is expected that the necessity of relaxing the issuance conditions of urban investment bonds on the financing side will decrease, and the scarcity of urban investment bonds will be further enhanced. It is still expected to be a high-quality allocation option in the context of asset scarcity.

Based on the high importance and positive and powerful measures of debt resolution in this fiscal press conference, our recognition of the stability and scarcity of urban investment bonds has increased. In the current context, it is recommended to focus on the allocation opportunities of urban investment bonds with relatively controllable risks and higher interest rate protection.

I. Fund side

From October 8th to 12th, the central bank net withdrew 132.5 billion yuan, including reverse repurchase injections of 37.01 billion yuan and maturities of 169.51 billion yuan. As of October 12th, the reverse repurchase balance was 37.01 billion yuan, a significant decrease from 169.51 billion yuan on September 30th.After the National Day holiday, the interbank liquidity situation gradually improved. Compared to the last trading day before the holiday (September 30), the prices of R001 and R007 on the weekend (October 12) fell by 41 basis points (bp) and 31 bp to 1.35% and 1.53%, respectively. The prices of DR001 and DR007 fell by 20 bp and 10 bp to 1.32% and 1.45%, respectively. From October 8 to 11, the bill rates noticeably fell. On October 11 compared to September 30, the 1-month, 3-month, and 6-month bill rates fell by 55 bp, 130 bp, and 17 bp to 1.45%, 0.45%, and 0.89%, respectively.

The net financing of interbank certificates of deposit turned negative. From October 8 to 12, interbank certificates of deposit were issued for 89.6 billion yuan, with net financing of -233.4 billion yuan. From September 23 to 29, interbank certificates of deposit were issued for 867.3 billion yuan, with net financing of 122.9 billion yuan. In terms of subscription rates, the subscription rate for interbank certificates of deposit fell to 79.2%, compared to 91.9% the previous week. In the secondary market for certificates of deposit, on October 11, the yield of one-year AAA interbank certificates of deposit was 1.94%, up by 3 bp from September 30. During the week, it rose from 1.96% to 2.01% on Wednesday and then fell back to 1.94% on Saturday.

II. Bond Market

During the process of A-shares rising and then falling, the yield of interest-bearing bonds slightly fell last week, while the credit spread widened and then peaked. In the first week after the National Day holiday, the interest-bearing bond market was generally on a downward trend. The closing yield of the active 10-year government bond (240011.IB) and the active 10-year national development bond (240210.IB) on Saturday (October 12) were 2.135% and 2.2225%, respectively, down by 1.82 bp and 2.25 bp compared to September 30. The turnover rate of 240210.IB also increased.

The credit bond market showed a stop and stabilization trend, with the transaction scale first rising and then falling. Looking at the credit spread of AAA-rated municipal and corporate bonds, as of last Friday, they were 78.03 bp and 61.18 bp, respectively, down by 6.24 bp and 6.94 bp from the credit spread peak on October 10.

III. Convertible Bonds

Last week, the stock market and the convertible bond market rose and then fell on October 8, with market expectations weakening from strong to weak. The Wind All A index closed at 4,742.18 points, with a weekly decline of 4.04%, and the CSI Convertible Bond index closed at 383.03 points, with a weekly decline of 2.48%. The median price of convertible bonds fell from 117.00 yuan on October 8 to 110.4 yuan, which is at the 15.7% percentile since 2023. During this round of the equity market's rise and fall, convertible bonds initially lagged in appreciation and were relatively insufficient in their resistance to decline. The main reason may still be the decision-making lag of convertible bond allocation funds and the incomplete resolution of credit risks for some targets.