As 2024 unfolds, the issuance of ultra-long-term special government bonds, often referred to as "special bonds," is gaining traction as a sought-after investment option amid a rapidly changing financial landscapeBursting onto the scene, these bonds have drawn considerable attention from both institutional and individual investors since their debut in late May, with their trading volumes capturing considerable market interest.

Experts in the financial sector have observed several distinctive characteristics characterizing this current round of special bond issuancesNotably, this issuance features an "ultra-long" duration and a slower rhythm compared to previous timesCoupled with the continuous decline in deposit rates and a scarcity of high-quality investible assets in the market, the appetite for investing in ultra-long special bonds has risen significantlyHowever, there are concerns about the escalating risks associated with price fluctuations in the secondary market, leading many personal investors to favor transactions through first-tier bank counters

In the long run, it is essential to enhance the connectivity between the bank counter markets, interbank bond markets, and exchange markets.

The reemergence of special government bonds has marked a strategic financial maneuverOn June 14, an extraordinary 50-year special bond was issued for the first time, generating a substantial issuance amount of 35 billion yuan with a ticket rate determined at 2.53%. This issuance represents the third series of ultra-long bonds for the year 2024 since the earlier ones in MayFor context, the first and second special bonds of 2024, spanning 30-year and 20-year durations, were both issued in May with face value amounts of 40 billion yuan each, carrying respective interest rates of 2.57% and 2.49%. Additionally, a re-issuance for the second phase of the 2024 special bond has recently completed its bidding process.

As outlined in the issuance plan published by the Ministry of Finance on May 13, the special bonds for 2024 will encompass maturity periods of 20, 30, and 50 years, culminating in a series of 22 issuances from mid-May to mid-November.

Special government bonds distinguish themselves from conventional treasury bonds through their flexible approval processes and their exclusion from deficit calculations

• $83 Billion Gold Bonanza Boosts China's Economy
• Yuan Plunge Shakes Global Markets
• Currency Defense: India Detaches from the Dollar
• SME Banks Accelerate Wealth Mgmt Sales Channel Expansion
• Do Biodegradable Plastics Have a Future?

These bonds serve specialized purposes, including addressing significant policy objectives and responding to major public crisesHistorically, China has issued special bonds on three notable occasions: in 1998 to inject 270 billion yuan into the four state-owned banks; in 2007 to issue 1.55 trillion yuan aimed at acquiring foreign currency for the establishment of China Investment Corporation for overseas investments; and in 2020 with 1 trillion yuan allocated to support businesses and individuals impacted by the pandemicFurthermore, certain special bonds were re-issued or extended in 2017 and 2022.

A report from Guangdong Kaihua Securities indicates that by the end of April 2024, the total outstanding special bonds in the country reached 50.9 trillion yuan, comprising 16.9% of the total government bond inventoryIn this portfolio, 15-year, 20-year, 30-year, and 50-year bonds accounted for 0.1%, 1.6%, 11.6%, and 3.6%, respectively

A comparative analysis with overseas markets reveals that many major economies have opted for ultra-long government bonds as a fiscal financing approach, highlighting a relatively low participation of China's special bonds at 16.9%, suggesting room for growth.

Liu Susheng, Deputy Director of the National Development and Reform Commission, emphasized during an April 17 press conference that these special bonds primarily target enhanced technological independence, promoting urban-rural integration, fostering regional development coordination, improving food and energy security, and driving high-quality population growth, among other pivotal tasks.

According to research from Jianxin Futures, the three preceding issues of special bonds were primarily solutions to urgent needs arising from unique circumstancesHowever, this year marks the beginning of a continuous issuance of special bonds aimed at financing significant projects in the drive for national prosperity and rejuvenation, reminiscent of China's infrastructure-focused bond issuance from 1998 to 2008.

This recent issuance's ultra-long bond profile aligns with long-term projects that yield slower short-term returns, supporting mid- to long-term economic growth, while also alleviating immediate repayment pressures by leveraging the central government, extending the debt maturity, and balancing economic needs with local government debt burdens.

Undoubtedly, the challenging real estate sector and decreased land transfer income have contributed to intensified debt pressures for local governments

Consequently, the issuance of special bonds could effectively offset some of this financing gap, thus mitigating pressure on local finances via central leverageIn addition, unlike traditional measures such as lowering interest rates, leveraging fiscal tools can deliver direct stimulus effects.

Meanwhile, enthusiasm among investors for these ultra-long special bonds shows no signs of waningCorporate banks have demonstrated an overwhelming demand for recently issued special bonds, with 30-year and 20-year variants often selling out shortly after becoming availableSome banks have repeatedly added issuance quotas, yet they still sell out promptly, highlighting robust participation from individual investors.

The secondary market for special bonds has exhibited lively trading dynamics as wellFor instance, on its first day of trading, the bond "24 Special Debt 01" recorded an astonishing 25% surge, leading to multiple temporary trading suspensions, while "Special Bond 2401" experienced similar trading patterns with a 23% spike.

As of June 14, market reports reveal that ultra-long bonds are performing strongly, with 30-year treasury bond yields nearing the 2.5% threshold

In examining the allure of these treasury bonds, Li Peijia, head of the financial research team at Bank of China, pointed out that the declining interest rate environment, scarcity of premium assets, and diminishing yields of various financial products collectively boost the appeal of treasury bonds, which are characterized by zero risk, high overall yields, liquid assets, and exemption from interest income tax.

For example, the first series of special bonds in 2024 offers an interest rate of 2.57% over a 30-year duration, yielding annual returns superior to three-year fixed deposits while exhibiting greater liquidityAdditionally, returns can be enhanced further through capital gains from trading, benefiting from the tax exemption on interest incomeThus, from both a yield and flexibility perspective, these bonds present a captivating investment proposition.

Notably, Xingtong Financial's deputy director, Xue Hongyan, indicates that traditional depositors typically perceive both deposits and treasury bonds as risk-free investment vehicles, with demand leaning towards the offering with higher interest rates

The recent decline in deposit rates has consequently increased interest in special treasury bonds given their attractive yields.

Yang Xiaodong, chief economist at the Shanghai Financial Development Center, has observed a shift in the demographic profile of investors in treasury bonds, with younger investors increasingly showing interest based on their age and risk toleranceTraditionally, older investors and those with lower risk appetites favored these bonds, but the demographic has expanded, leading to a growing proportion of younger investors adopting this asset class.

Researcher He Yurui from Puyin Standards believes that the rarity of special bonds in the market may draw interest from specific investor segments seeking longer investment horizons, such as 50-year bonds that cater to those desiring stable, long-term returns.

He further asserts that special bonds not only diversify the bond market's offerings but also unveil innovative investment strategies and asset allocation choices for both investors and financial institutions, particularly in the current global low-interest environment.

Nevertheless, despite increasing interest in these bonds, investors must remain vigilant regarding potential market volatility risks

Yang Xiaodong cautions that investing in traded government bonds exposes investors to secondary market price fluctuations.

Li Peijia further warns that while government bonds secure steady and reliable returns, impulsive trading can elevate investment risksAs a specific category of traded bonds, special bonds fluctuate with the market, posing potential losses for individual investors in a rising interest rate environmentThus, close monitoring of interest rate trends is crucial.

Xue Hongyan echoes these sentiments, suggesting that long-term uncertainties could trigger systemic increases in market interest rates, resulting in declining bond prices, and thus investor must be aware of potential price discounts upon sellingHe stresses that a 30-year bond may be too lengthy for many investors, necessitating considerations for mid-term transfers and potential price fluctuations.

Overall, while special bonds can be enticing for investors with a higher capacity for risk and trading acumen, ordinary depositors might find greater benefit by seeking high-yield deposit products

According to Li Peijia, making purchases on the primary market is generally more suitable for regular investors, given the simplicity of acquiring bonds at par value without the need to time interest rates accurately.

“It is critical to note that should investors wish to trade special bonds bought through banks in the secondary market, they must arrange for cross-market transfer to securities exchanges," Yang Xiaodong notes.

Li Peijia also criticizes the currently smaller scale of the commercial bank counter market, which remains somewhat segregated from other markets, leading to discrepancies in bond pricing and interest rates across platformsThis division not only hampers liquidity but also reduces the overall operational efficiency of the bond marketEnhancing connectivity between the counter market, interbank bond markets, and exchange markets is key to boosting the efficiency and accessibility of bond trading.