A Study On The Conditions Of Treasury Yield As The Base Rate

At present, China’s interest rate reform has entered a critical period and crucial stage. The key lies in the establishment of benchmark interest rate as well as the formation of the benchmark interest rate system. As one of the basic work of this reform, if we can build the yield curve that reflects market supply and demand, and if the Treasury yield curve can further play an important role in the allocation of financial resources, it will be helpful to the reform. Based on the determinants of bond yields,the formation conditions of benchmark interest rate as well as China’s financial system and other aspects,this paper discusses that if there is a benchmark interest rate that can be a reference for central bank and all the market participants,and identify constraints factor,and finally propose appropriate policy advice. In this paper, the benchmark interest rate is for the main line, with treasury bond yields as a starting point for the discussion of the selection of the benchmark interest rate. The article is organized as follows:The first chapter:sort out the existing literature, and find that the existing articles of benchmark interest rate are more concentrated in terms of the relationship between interest rates and other market interest rates and their effect on macroeconomic conduction.This paper argues that to some degree,the econometric test is reasonable, but not rely solely on the measurement of interest in conducting internal logic analysis slightly rounded at the end of this request too. China’s financial system, although there are many short comings, but not chaotic. Although the interest rate transmission is slow, but it is not valid. So if we use short-term interest rate to do the test,we can always get better test results and get different “best answers”.This paper argues that the core of the benchmark interest rate issue is not the choice of which is the market benchmark interest rate or the central bank benchmark, but rather what kind of formation conditions of such a benchmark interest rate as needed.The second chapter, according to the interest rate term with institutional investor preferences and, through the establishment of the regression model, from the perspective of market supply and demand determinants of yields,we find that: First, China’s bond market is a buyer’s market; secondly, the yields greatly influenced by the asset allocation of commercial banks; finally repo rate impacts on short-term debt and long-term bonds are quite different. The results of this part is a support for this discussion about benchmark rates.The third chapter,the analysis of benchmark interest rate forming conditions First, we compare China and the US interest rate system and found the difference, the main difference is focused on short-term interest rates. In China, in the system of short-term interest rates, bond yields are not at the bottom of the interest rate market, time deposit rate and short-term deposits rate are lower than short-term treasury bond yields. But in the long-term rate systems, the two basically the same, that bond yields are at the bottom of the market interest rates. Secondly, in terms of social financing structure, the structure of assets and liabilities of banks, bond market investors structure,we illustrate why the US federal funds rate or money market yields can be connected through commercial banking, capital markets and credit markets, and ultimately the real economy affected. Finally, pointed out that China does not meet the conditions of single benchmark interest rate, the market does not yet exist an interest rate that can assume their responsibility, and analyze the reasons. Yields still can not serve as the central bank benchmark, and to a market benchmark, also depends on the scope of the market.The fourth chapter,the conditions of market reference rates are analyzed. Through analyzing themarket benchmark Treasury yields history in USA, we hold the opinion that excellent liquidity is the key to become the market benchmark, and the factors associated with the liquidity issue are size of government bonds,huge repo market and futures Market and relationships with other prices.Chapter V, the correlation test of yields and the market price of other products.We found that long-term bonds was significantly better than the short-term. And through the VAR variance decomposition of time series yields and corporate bond yields of the same maturity,we also found that changes in long-term bond yields have greater impact on changes in corporate bond yields of the same maturity.Chapter VI,the liquidity test. First noted that the overall liquidity of the bond market is not quite good. Then, for each bonds of all maturities liquidity test, this paper selects turnover, bid-ask spreads and real-time transaction costs of the three indicators of liquidity inspection, inspection also found that the transaction costs of long-term bonds are lower than short-term bond,and then this paper give explaination of this results in terms of transaction costs, the issue size, investor structure, market maker structur. Finally, this paper comes up with the opinion that CDB debt liquidity is better than bonds liquidity, raised the question that whether the CDB bond rate can be called market benchmark. And then this paper provides a comparison between treasury bond yield and CDB bond yield,in the terms of the frequency scale, the scale of the repo market, and corporate bond yields.Chapter VII, conclusions and policy recommendations. Based on the above analysis, we come to the conclusions that there does not exist a singular benchmark interest rates in China, treasury bond yields as a benchmark interest rate bond market also has to be improved, and then put forward the corresponding policy recommendations.