The Reverse Repo Rate Reflects The Central Bank'S Interest Rate Guidance.

The central bank's open market in October 27th conducted a 10 billion yuan 7 day reverse repurchase operation, winning the bid rate of 2.25%, lower than the previous value (2.35%), for the first time since August, the 7 day reverse repurchase rate was 10 basis points.

Li Qilin, a fixed income group of the people's livelihood securities, reported that the reverse repo rate reduction reflected the central bank's policy intention to lower the interest rate.

The reverse repo rate reduction reflects the central bank's guiding interest rate policy downward.

The reverse repo rate reduction generally falls into two categories. When the money market interest rate is high, the central bank will reverse the repo rate to guide the market interest rate downward. For example, when the interest rate cut in early 2015, the 7 day mortgage repurchase rate in the money market increased from 3.7% to 4.8%, and the reverse repo rate in the open market fell from official 3.85% to 3.75%, reflecting the intention of the central bank to guide the downward trend of the capital interest rate; one is that the interest rate in the money market has descended, and the central bank has followed the market to reverse the repo rate. After April 2015, the market capital interest rate dropped sharply, and the central bank subsequently guided the reverse repo rate downward.

For now, on the one hand is the 7 day pledge.

The difference with the 1 year deposit is still high, about 80BP. After the rate cut, the rate of money market interest rate did not follow the deposit interest rate, which weakened the control effect of the interest rate reduction. Therefore, the central bank lowered the reverse repo rate, which led to the downward trend of market interest rate. The decrease was 10BP, slightly lower than that of the market 15-20BP, but considering the current flat yield curve and the policy request of reducing the entity financing cost, it is expected that there will be room for further downward adjustment in the future. The 7 day mortgage repo rate will fall to 2.1%, and the 7 day mortgage repurchase rate operation center will also focus on the 2.1% central fluctuations in the near future.

After the interest rate liberalization,

The central bank will set up a new policy to control interest rates, and the guiding effect of future open market operating interest rates on money market interest rates will be enhanced.

An important role in reducing interest rates is to guide society.

Downlink, but taking into account the sharp narrowing of the current period spreads, credit spreads are also down to historical lows. If money market interest rates do not decline, then the long end interest rate downside is relatively limited, correspondingly, the scope of the whole society's financing costs can be reduced significantly, which will weaken the actual policy effect of reducing interest rates.

Overall, we believe that under the trend of interest rate liberalization, the future policy interest rate will be based on the open market operation interest rate, and the market interest rate will be guided through the open market operation interest rate.

At present, taking into account the flat yield curve and the downward pressure on the real economy, the policy level has the demand to reduce the cost of entity financing. It is expected that the central bank will guide the market capital interest rate downward, which will lead to the formation of steep yield curve and further guide the long end interest rate to further downward.

Investment strategy suggests continuing to play bull steeped, credit debt maintaining high lever and leveraged carry trade strategy.