- The yields on China's 30-year treasury and China Development Bank (CDB) bonds continued their downward trend in early trading on Tuesday. The yields on the actively traded 30-year bonds retreated by 1 to 2 basis points, with long-term and ultra-long-term rates leading the spot bond market.
- Despite the traditional pressure on cash flow during the tax period, interbank market liquidity remained abundant, with stable overnight and seven-day funding conditions providing underlying support for bullish sentiment in the bond market.
- The Ministry of Finance (MOF) of China confirmed that the first issuance of ultra-long-term special treasuries for this year will commence on April 24. The issuance window is set from April to October, with a normalized and smooth supply pace alleviating market concerns over short-term supply shocks.
Pricing of Active Bonds and Characteristics of Spot Trading
Spot trading data from early Tuesday's session showed that the downward channel for long-term rates has further opened. The 30-year government bond (260002) with the most active trading reported a latest traded yield of 2.2410%, falling 1.4 basis points from the previous day's closing. The 30-year CDB bond (210220) saw an even greater decline, with the latest trade at a yield of 2.07%, down 2.1 basis points. In contrast, the 10-year treasury active bond (260005) last traded at 1.75%, slightly down by 0.6 basis points. This flattened or even inverted yield curve indicates a strong demand from the market for long-duration assets. Traders pointed out that in the absence of significant improvement signals in macroeconomic fundamentals, the scarcity of interest-bearing assets continues to drive financial institutions to extend durations, and the liquidity premium for ultra-long-term bonds is being continuously compressed.
Interbank Liquidity and Tax Period Hedging Mechanism
Traditionally, tax period cash flows in the middle and later part of the month often cause a phase of liquidity drainage in the interbank market, thereby raising funding rates. However, feedback from traders at Shanghai brokerages indicates this tax period cash flow is "barely felt" by the funding environment. This extremely loose funding state is partly due to precise injection and hedging by the People's Bank of China (PBOC) in open market operations, and partly reflects relatively weak credit-derived demand at the real economy level, leading to a large accumulation of funds within the interbank system. The ample funding environment significantly lowers financing costs for leverage and arbitrage operations, providing the bond market with a thicker cushion against potential policy disturbances.
Institutional Holding Structure and Short Covering Effect
Analysis by the fixed income team at Lianchu Securities and several bank traders revealed the current bond market's microstructural fragility and unidirectionality. Some public funds and wealth management products adopted relatively defensive short-duration positions earlier to mitigate potential duration risks. As yields continue to dip without a visible rebound, these defensive positions face significant pressure due to relative performance assessment. The energy for short positions is extremely limited and congested in the current ample liquidity environment, making it easy to trigger short covering and short-to-long trades upon any positive signal in the market. This resonance between technicals and funding aspects considerably amplifies the downward slope of long-term yields. If subsequent credit data do not significantly rebound, this imbalance in micro-trading structure may persist.
Ultra-Long Bond Supply Pace and Duration Strategy Outlook
Market worries about a large-scale issuance of government bonds were substantially alleviated after the Ministry of Finance announced specific issuance plans. According to the plan, the first issuance of ultra-long-term special treasuries this year will be on April 24, with the issuance period smoothly spread from April to October. This normalized and smooth issuance mechanism effectively avoids concentrated supply shocks on the market's absorption capacity. Regarding the term structure, compared to last year's actual issuance, an additional 30-year tranche was introduced, while the number of 20-year and 50-year tranches remained unchanged, and the 15-year tranche was canceled. This structural adjustment precisely meets the allocation preference of insurance institutions and long-term financial funds for 30-year risk-free assets. As long as the issuance pace of ultra-long bonds doesn't cause short-term liquidity friction, a buy-on-dips duration strategy will remain the preferred choice for most fixed income institutions.
