In early 2024, China's bond market witnessed a robust surge, with the yield on 10-year government bonds falling below 2.5%, marking a recent low. This trend was primarily driven by two factors: expectations of a loose monetary policy and a stable and ample liquidity environment.
Recently, the People's Bank of China announced an additional 350 billion yuan in pledged supplementary loans to major development banks, supporting the broader real estate policy. This measure has led to an increase in long-term bond rates. The relative weakness in the stock market has provided emotional support to the bond market, while the liquidity condition continues to be stable and somewhat loose, leading to a sustained downward trend in long-term bond rates.
Verbal directives from regulatory authorities to primary dealers, particularly regarding the control of the scale of non-bank financial outflows at the end of the month, have also supported the strength in the bond market. This regulation helps prevent a repeat of the overnight rate spike to 50% at the end of November last year, stabilizes the funding for securities firms, and better controls the broad credit funds.
The leverage ratio in the interbank market has increased, and the volume of repo transactions has significantly rebounded, indicating that the market's liquidity remains ample. The increase in the net funding scale of the banking system reflects the ample liquidity. Additionally, there is a high probability of a downward shift in the yield curve of the bond market, but the extent of this decline is expected to be limited due to the unchanging trend of economic recovery.
In terms of bond selection, the amplifier attributes of commercial banks' Tier 2 capital bonds and perpetual bonds stand out. The spread compression of municipal bonds continues, with short-term bond strategies becoming the main focus. With the central bank's relaunch of pledged supplementary loans (PSL) and the advancement of a comprehensive debt scheme, a positive impact on the restoration of the land market is anticipated, which in turn will benefit municipal bonds.
In summary, the current strong performance of the bond market is mainly driven by expectations of a loose monetary policy. The stability and relaxation of the liquidity environment also play a significant role. The regulatory control over non-banking institutions' funds, the downward trend of long-term bond yields, and the bond market's gradual desensitization to weak fundamental expectations have all positively supported the bond market. While there are some upward risks, the bond market is generally expected to continue its upward trajectory in the short term.
