The central bank launches new tools to stabilize the bond market. How to use them?

Yesterday (26th), the central bank officially launched a new tool, the non-bank large redemption swap facility in the bond market. What exactly does this tool do? What does it have to do with us?

Q What is this tool?

As can be seen from the name, this tool is mainly aimed at: bond market, non-bank, and redemption. To simply understand, this tool is aimed at non-bank financial institutions such as bank financial management and public funds. The central bank has opened up an emergency lending channel, which is specially used in extreme situations where the bond market fluctuates significantly and products experience concentrated redemptions.

Q Why should we introduce new tools?

Nowadays, many people's money is used to buy bank financial management and public funds. These products are very large, with a scale of more than 70 trillion yuan. A large amount of the funds purchased by everyone are allocated in the bond market. It operates smoothly under normal circumstances, but once extreme market conditions occur, the risks cannot be ignored. For example, there was a wave of financial management redemptions at the end of 2022. At that time, many investors concentrated on redeeming products, and asset management institutions were forced to sell bonds, causing bond prices to fall. The net value of the products fell further, which triggered more redemptions, forming a vicious cycle of "redemption, selling, and falling."

The establishment of this tool is to avoid the spread of risks in this vicious circle in the bond market.

Q How to use the new tool?

The central bank cannot directly grant loans to non-bank institutions and adopts an asset swap model. Simple understanding: Qualified asset management institutions borrow central bank bills from the central bank, use the bills to raise funds in the market, and obtain funds to undertake qualified assets that have been sold in panic, thereby interrupting the vicious cycle.

Q As soon as the bond market falls, will the central bank intervene immediately?

Not really. It is an emergency tool in extreme scenarios, not a daily market adjustment method. It will only start when the bond market fluctuates violently and a large number of asset management institutions encounter redemption pressure at the same time, and a vicious cycle of redemption and selling is about to form.

If the credit risk is caused by the institution's own investment mistakes and credit defaults, it is not within the scope of the central bank's tool rescue, and needs to be borne by the institution itself, dispelling the market's illusion that "if something goes wrong, there will be someone to rescue you."

Don’t tell the truth when it comes to emergencies

Save the market but not the troubled institutions

The core principle of this policy is to rescue emergencies without bailing out, and to save the market but not troubled institutions. The establishment of this tool is not to ensure that everyone’s financial management and funds only make profits but not losses. Its significance is to prevent systemic risks and maintain the smooth and orderly operation of the bond market when extreme market shocks arrive.