Under the catalysis of various policies, bond market investors have significantly strengthened their unanimous bullish expectations for the 'bull market.'

"Interbank certificates of deposit are going crazy!" Industry insiders exclaimed on social media.

At the opening on December 2nd, interbank certificates of deposit for all maturities fell by more than 10 basis points, with some even decreasing by as much as 20 basis points, marking the largest single-day drop in recent years. Looking at the performance throughout the day, the largest drop in the one-year AAA interbank certificates of deposit rate among national banks was 14.5 basis points, with many falling below 1.7%, narrowing the spread with the PBOC's 7-day reverse repo rate (1.5%) to 20 basis points. In addition, the yield on the 10-year national bonds, the most representative, hit a new low, entering the '1 era.'

A senior bond trader believes that from a trading perspective, the downward guidance of the one-year certificate of deposit rate by the PBOC may represent an intention for a loose monetary policy.

According to the PBOC website, on the morning of December 2nd, the 2024 China Financial Society Academic Annual Meeting and the China Financial Forum Annual Meeting opened in Beijing. PBOC Governor Pan Gongsheng stated that next year, they will continue to adhere to a supportive monetary policy stance and policy orientation, comprehensively utilizing various monetary policy tools, and intensifying counter-cyclical adjustments.

"Expect the PBOC to cut interest rates once in the next two months, further cut rates once in the second half of next year, and the 10-year national bond rate may further decline to a range of 1.7-2.2%; the one-year certificate of deposit rate may be reduced to 1.3%." A chief fixed income analyst at a brokerage firm stated. Similar predictions are held by the aforementioned traders.

Institutions are rushing ahead, with the market going 'crazy' for interbank certificates of deposit.

As is well known, on November 29, the market interest rate pricing self-discipline mechanism issued two heavyweight initiatives ('interest rate adjustment bottom guarantee provision' initiative, 'interbank deposit rate initiative'), which took effect on December 1, significantly impacting the bond market and causing various bond investors to rush to exit.

From today's market situation, the long end 10-year government bond has entered an era of 1%; for policy bank bonds, the 1-year policy bank bond decreased by nearly 8.4 basis points to 1.53%, and the 10-year policy bank bond decreased by 3.75 basis points to 2.0625%. Interbank CDs have seen a 'crazy situation' not seen in a long time. Data shows that in terms of bid prices, interbank CDs of various maturities once dropped by more than 10 basis points, while in the secondary market, the 1-year AAA national stock CD dropped to 1.7% on the same day, trending similarly to the 1-year policy bank bond, marking the largest single-day decline in recent years.

In a research report, China Securities fixed income expressed that in the past few years, there has been a clear theme in bonds. Besides the logic at the economic level, on the interest rate side, loan rates drop first, but deposits and existing mortgage rates do not, leading to a surge in deposits and mortgage repayments, which in turn leads to deposit and existing mortgage rate reductions. However, the money market rates do not drop, causing deposits to flow to non-banks, ultimately resulting in the need for money market rate cuts. With rounds of interest rate cuts, the bond market will continue to maintain a bull market.

Many market participants believe that interbank CDs, as standardized tools for secondary market trading, have a significantly better cost-effectiveness in terms of holding until maturity yield and liquidity compared to interbank deposits, and with this 'initiative' implemented, the final step in the interest rate transmission process, the bottleneck in deposit and loan rates, has been cleared.

Huatai fixed income team believes that prior to being included in self-regulation, non-bank interbank demand deposits mainly anchored at rates of specific maturity interbank CDs. In the past three years, the central bank's policy rates have decreased from 2.2% to 1.5%, but the pricing of non-bank interbank demand deposits has remained relatively stable around 1.75% for a few years, deviating from a reasonable level and failing to reflect the central bank's policy rate transmission, showing insufficient marketization of interbank deposit rates.

1-year interbank CDs may demonstrate signs of loose monetary policy.

From the PBOC's interest rate transmission statement, 1-year CDs may demonstrate the intention behind loose monetary policy.

In the aforementioned market interest rate pricing self-discipline mechanisms, the 'interbank deposit rate initiative' requires non-bank interbank deposit rates to be included in self-regulation. Currently, non-bank interbank demand deposits have significantly deviated from a reasonable level, failing to reflect policy rate transmission, and exhibiting a lack of marketization, giving rise to arbitrage opportunities. Authorities state that with the new initiative taking effect, it will help streamline interest rate policy transmission, reduce arbitrage opportunities, and return to the essence of interbank business.

In the opinion of the aforementioned traders, one of the manifestations of domestic monetary policy easing is the further downward guidance of the one-year fixed income deposit rates by the central bank.

With the release of the above-mentioned new regulations on interbank deposits, the market's pricing logic for the current interest rates on interbank deposits has generally formed an implicit upper limit pricing based on the 7-day open market operation rate of 1.5%, while today's one-year interbank deposit rates have significantly decreased by following a pricing logic that closely matches the 7-day open market operation rate + 20 basis points. Everbright Bank's chief analyst Wang Yifeng believes that after the non-bank interbank current deposit rates decline, the yield curve shape at the short end will also be closer to the policy rate.

The aforementioned traders stated that there are two main methods for the central bank to guide the downward movement of one-year fixed income deposit rates: price-related - reducing the 7-day repo rate; quantity-related - injecting medium- to long-term funds, including but not limited to reserve requirement ratio cuts, net injections of MLF, central bank purchases of government bonds, and repurchase agreements. In their view, the factors constraining the central bank include the fact that we are in a global integrated monetary policy system, with many external input variables. The most critical ones are the level of the Federal Funds Rate, the strength of the US Dollar, and trade conditions (which constrain the depreciation space of the spot exchange rate).

Recently, Federal Reserve officials have come out to manage expectations of interest rate cuts, with the two-year U.S. Treasury yield falling to around 4.20%. A 25 basis point interest rate cut by the Federal Reserve in December has become a highly probable event. As for the US Dollar Index, due to the fundamental historical mission of the Trump administration to deal with the staggering $36 trillion US debt, moderate 'debt monetization measures' are inevitable. We see that as Trump's inauguration approaches, the US Dollar Index is gradually weakening.

"With the lowering of the Federal Funds Rate and the weakening of the US Dollar, there will be increasing room for domestic monetary easing," said the trader. In other words, if exchange rate pressures decrease, we may further relax monetary policy.

The statement by the central bank on the 2nd may partly indicate future trends.