Abstract: Since the fourth quarter of 2023, China’s long-term interest rates have experienced a significant decline, raising concerns among regulators about the duration risk faced by small and medium-sized financial institutions heavily invested in long-term bonds. Over the past month, regulatory authorities have taken various measures to halt this one-sided downward trend in long-term rates, yet there remains considerable divergence among domestic and international market participants regarding their outlook. Some believe that China's long-term interest rates have returned to a reasonable equilibrium, while others argue that the current stabilization and recovery is merely temporary.
In a previous briefing titled "How to View the Recent Downtrend in Long-Term Interest Rates," we attempted to understand this downtrend from the perspective of changes in long-term inflation expectations. However, these expectations are influenced by the interplay between economic agents and macro policies, and their alteration requires certain conditions.
This article seeks to explore under what conditions long-term interest rates can stabilize and rise smoothly. To address this, we first identify sample periods of long-term rate increases across different countries and classify these into "short-term rate-driven" and "term premium-driven" models. We will then examine the economic and financial indicators associated with each model to summarize the underlying logical differences. Finally, we will provide relevant policy insights.
