On September 3, the central bank's net withdrawal of funds was 472.5 billion yuan. The trend of tightening funds has been evident since this week, with a cumulative tightening of funds of nearly 1.4 trillion in two days. This is in stark contrast to the stable attitude of the central bank in protecting the stability of the money market during the unilateral adjustment of credit bond prices last week.

Looking at the funding situation last week, the central bank conducted a cumulative injection of 1,701.8 billion yuan in reverse repos and a 300 billion yuan Medium-Term Lending Facility (MLF), resulting in a total net injection of 804 billion yuan of liquidity throughout the week, driving down funding costs gradually towards the end of the month. As of August 30, R001, R007, DR001, and DR007 were 1.66%, 1.84%, 1.53%, and 1.7% respectively. Compared to the previous month, they changed by -23.14BP, -8.06BP, -28.22BP, and -14.78BP. The liquidity remained relatively loose at the end of the month.

Xu Jinjing, an analyst at Dongwu Fixed Income, believes that the timing of the end of the unilateral adjustment of credit bond prices depends more on the timing of the end of the adjustment of interest rates, which in turn depends more on the timing of the end of the adjustment of the funding situation. Xu Jinjing points out that the funding situation is usually relatively tight at the end of the month, and the clear intention of the central bank to protect the funding situation last week is an important observation window for reversing the sentiment in the bond market.

Industry insiders said that since August, the trading activity of government bonds has significantly declined, and the pricing power of long-term bonds may be mainly held by insurance companies and city-rural commercial banks. Their institutional trading behavior deserves close attention, especially the risk of amplified market volatility caused by the rapid entry and exit of city-rural commercial banks. In addition, although the scale of wealth management products has declined in August, the risk of hitting the net asset value (NAV) is still controllable. In terms of institutional behavior, the focus should mainly be on the continuous redemption risk of follow-up bond funds. At present, the possibility of deep negative feedback in the bond market is limited.

Looking at the institutional behavior data from last week, according to Debon Fixed Income's statistics, the main buying source of cash bonds came from insurance companies, with a net purchase of 101.3 billion yuan, an increase compared to the previous week. The main selling source of cash bonds came from fund companies, with a net sell of 172.4 billion yuan.

Lu Pin, Chief Fixed Income Officer at Debon Fixed Income, stated that the leverage ratio of institutions has decreased, which is an important support for the release of liquidity by the central bank. In terms of data, as of the end of last week, the leverage ratios of banks and insurance companies were 103.3% and 122.9% respectively, which were at historical percentile levels of 8% and 36%.

During recent earnings conferences of major insurance companies, insiders in the insurance industry continue to be bullish on the structural opportunities in the bond market. Increasing the allocation of long-term bonds and increasing portfolio returns through trading and securities hedging has become the mainstream investment strategy of insurance institutions.

Sugang, Chief Investment Officer of China Pacific Insurance, stated that in the second half of this year, the capital markets are likely to maintain a stable and volatile pattern. Periodic fluctuations will also breed new opportunities, requiring continuous optimization of investment strategies for various investment types. The future market interest rate center will generally maintain a downward trend. Insurance fund utilization will always adhere to the basic principles of prudent investment, long-term investment, and value investment. At the strategic asset allocation level, it will persist in using long durations and stable cash flow fixed income assets as the cornerstone, while actively seizing opportunities in innovative fixed income products like ABS and REITs, increasing the proportion of other bond investments, and easing the allocation pressure of insurance funds.

However, according to the Huaxi Fixed Income Team, considering that the duration of the current trading portfolio is still not low, in the context of the initial stabilization of the current market, a high duration may still be a potential trigger for volatility. Focus on the risks of the trading portfolio and the strength of the allocation portfolio. However, the additional positions of small and medium-sized banks and insurers in the configuration end in September may smooth out the risk of a sharp adjustment in the bond market.

For unstable investment institutions on the liability side, such as public funds, and bank wealth management subsidiaries, some market participants believe that institutional behavior in the short term may still be cautious, with a primary focus on retreating to the high-rated short and medium-term positions to defend against liquidity risk as the top priority. It is possible to selectively allocate individual securities that have been undervalued due to being sold off to strengthen the yield space.