The Impact Of Exchange Rates Wide Fluctuation On The Term Structure Of Interest Rates In China’s Interbank Treasury Bond Market

The term structure of treasury interest rates contains abundant economic information,which is the pricing benchmark of micro financial assets and the measurement index of macro economic trend.In recent years,the reform of RMB exchange rates formation mechanism has been deepening.After the "8.11 exchange rates reform" in 2015,the exchange rates flexibility has been significantly enhanced,two-way exchange rates fluctuations have become normal,and the interest rates liberalization reform has been basically completed,which has enhanced the linkage effect between exchange rates and interest rates.The term structure of treasury bond interest rates reflects the comprehensive interest rates level of the financial market.With the opening of the inter-bank treasury bond market,the risk of its being affected by exchange rates fluctuations will gradually increase.The fluctuation of exchange rates affects the supply and demand of the bond market mainly by affecting the profitability of the bond and the liquidity of the market,and finally leads to the change of the term structure of the interest rates of the treasury bond.In the context of wide fluctuation of exchange rates,this influence mechanism will be amplified due to the increase of exchange rates flexibility.Therefore,the influence of wide fluctuation of exchange rates on the term structure of interest rates of interbank treasury bonds has become a content of research value.After reviewing relevant literature,it is found that the research on term structure of treasury interest rates mainly focuses on three aspects: curve fitting,curve prediction and influencing factors of curve.Among them,the influencing factors of the treasury bond yield curve focus on the macroeconomic variables,while there are few studies on the impact of exchange rates fluctuations.since the "8.11 exchange rates reform" in 2015.Exchange rates fluctuations mainly affect the yield curve of treasury bonds by affecting international capital flows,bond risk premium and monetary policy.When the exchange rates appreciates or depreciates,the yield level of bond and the liquidity of the market will change,which will affect the choice of bond investors and ultimately affect the term structure of the interest rates of treasury bond.The term structure of treasury bond interest rates is a collection of yield curves of different maturities,studying the impact of exchange rates fluctuations on each bond yield curve is too much work and impractical.Therefore,in order to analyze the impact of wide exchange rates fluctuations on the term structure of treasury bond interest rates,the common factors affecting the yield curve of treasury bond need to be extracted.To this,the paper uses dynamic NS model to fit the yield curve,and the results show that the model has a good fitting effect,and the three factors fitted can explain 99% of the variation of the yield curve.On this basis,in order to study the nonlinear dynamic relationship between exchange rates and three factors of term structure of treasury bond interest rates,this paper constructs the MS-VAR model of exchange rates,level factor and slope factor to analyze the influence of exchange rates changes on the yield curve of treasury bonds under different zone regimes.In addition,in order to compare the impact response relationship between exchange rates and three factors of treasury bond yield curve at different times before and after the "8.11 exchange rates reform" in 2015,this paper conducted impulse response analysis on three economic variables.Finally,the variance decomposition of exchange rates,level factor and slope factor is carried out to examine the contribution degree of the three economic variables to each other.The empirical results of MS-VAR model show that compared with before the exchange rate reform,the correlation between the exchange rate of RMB and the level factor and the slope factor is significantly enhanced after the exchange rate reform.In addition,after the "8.11 exchange rates reform" in 2015 influenced by the wide fluctuation of the exchange rates,there were several zone shifts between the exchange rates and the level factor and slope factor of the term structure of the interest rates of treasury bonds.During the period of exchange rates depreciation,long-term interest rates goes down and the spread between long and short term expands,namely,the treasury bond yield curve moves down and becomes steep,while during the period of exchange rates appreciation,long-term interest rates goes up and the spread between long and short term shrinks,namely,the treasury bond yield curve moves up and becomes flat.In the traditional economic framework,currency depreciation is regarded as a negative factor for the bond market,the empirical results show that exchange rates depreciation has intrinsic consistency between the bond bull market,the main reason is that the central bank intervention during the exchange rates fluctuations,and the economic growth is still Chinese top economic goal,float gives way to economic growth,even during the period of depreciation of the central bank will also provide liquidity,the effects of exchange rates fluctuations are eventually offset by the effects of monetary policy.In addition,after the exchange rates reform in 2015,the formation mechanism of the exchange rates became more transparent,and foreign investors became more confident in RMB.Therefore,even during the depreciation period,foreign institutional investors still increased their holdings of treasury bonds.Impulse response analysis and variance decomposition results show that the exchange rates has little influence on the level factor and slope factor.The level factor is mainly affected by monetary policy and interest rates differential between China and the US,while the slope factor is mainly affected by inflation and economic operation.However,the explanation of the level factor and slope factor for exchange rates fluctuations is as high as 24%.