According to Caixin News on December 16 (Reporter Yan Jun), the bond market never has the strongest performance, only stronger. In the past week (December 9-13), bond market yields continued to decline, with long-term rates hitting record lows.

There are several moments that can be called "witnessing history":

First, since December 9, after the 10-year Treasury yield fell below 2%, it surged ahead, breaking through 1.9% and 1.8%, heading straight for 1.78%;

Second, on December 14, the ultra-long-term yield, that is, the 30-year Treasury yield, fell over 4 basis points, dropping below 2%.

With the continuous decline in the yields of the 10-year and 30-year Treasury bonds, the bond market has ushered in a round of strong increases, which has also affected the landscape of the wealth management market:

First, bond fund yields have reached new highs, especially long bonds, with two 30-year Treasury Bond ETFs leading the way. Among them, the Pengyang 30-year Treasury Bond ETF had a weekly increase of 3.05%, and this ETF's ROI for the year has exceeded 20%. The second highest weekly increase is the Boshi 30-year Treasury Bond Index ETF, which rose by 2.82%. Currently, the combined scale of these two ETFs is nearing 10 billion.

Second, the yields of Money Market Funds have reached an historic low. Since December 5, nearly a hundred money market funds have seen their 7-day annualized yields drop below 1.3%. Industry predictions indicate that as bond yields continue to decline, the annualized yield of money market products will fall below 1% in the first half of next year.

Thirdly, the scale of Banks' wealth management has rapidly increased. According to reports, the top 11 Banks' wealth management subsidiaries increased their sales scale by nearly 150 billion in November alone, with several subsidiaries increasing sales by over 10 billion in a single month. The total management scale of the 11 subsidiaries has increased by over one trillion since the beginning of the year. The data for MMF also corroborates this trend; as of the end of the third quarter of this year, the total scale of money market funds has risen to 13.06 trillion yuan, an increase of 1.7 trillion yuan compared to the end of 2023, making it the type of fund with the largest total scale increase this year.

Fourthly, Analysts are hotly discussing the bond market in weekend Research Reports. Chief Fixed Income Analyst Yin Ruizhe from Guotou Securities published an article over the weekend discussing 'how much interest rate cut expectations have been pre-empted in the bond market.' He believes that through comparing interest rate swaps, changes in interest rates, and other multi-faceted analyses, it can be concluded that the pre-emption of neutral expectations is roughly around 30 basis points.

The bond market experienced a 'super week,' with ultra-long bonds rising over 20% this year.

In light of the pre-emption of future interest rate cut space and the push from the cross-year market itself, using the 10-year government bond yield's decline over 20 trading days as a measure, the bond market has achieved the largest increase at the 20-day level since March 2020.

This is reflected in the bond funds, with a staggering weekly increase, and bond fund holders are very satisfied. For example, the Pengyang 30-year Treasury Bond ETF has already achieved a ROI of 20% this year for ultra-long bonds, showing a momentum higher than that of equity funds.

Wind data shows that among passive Index bond funds, nearly 30 bond funds across the All Market had returns exceeding 1% last week, with most being long-term bonds. In addition to 30-year government bonds, there are multiple varieties such as 5-10 year financial bonds, 7-10 year policy financial bonds, and 10-year local government bonds.

Compared to long-term interest bonds, short-term interest rate bonds react more strongly, while the decline in one-year time deposit rates is relatively mild. In bond funds, medium and short-term bond yields lag behind the performance of long-term bonds.

Regarding the reasons, analysts point out that the political bureau meeting's stance on 'moderately easing' monetary policy and the strong trading expectations have led to the rapid decline of long-term bond yields, while for short-term bonds, the effects of concrete policy implementation are generally more evident. Clearly, the central bank has not yet implemented specific policies for rate cuts or reserve requirement reductions, leading to a relatively limited decline in one-year time deposit rates.

Is it time to pay attention to the risks in the bond market?

From both policy and trading perspectives, last week was a "super week" for the domestic bond market. Invesco Great Wall Fund summarized that the Central Politburo meeting on December 9th called for the implementation of "more proactive macro policies," including "more proactive fiscal policies" and "moderately loose monetary policies," which aims to deliver a policy "combination punch." The bond market subsequently entered a rate-cut trading phase, with the 10-year Treasury yield dropping to nearly 1.8%. On December 12th, the Central Economic Work Conference further supplemented monetary policy, proposing to "cut the reserve requirement and interest rates at the right time," which further stimulated expectations for rate cuts; the non-monetary counter-cyclical policies did not exceed market expectations, and the 10-year Treasury yield fell further below 1.8%.

So, does the rapid decline in long-term bond yields accumulate risks in the bond market?

Invesco Great Wall believes that the current economic operation still faces many difficulties and challenges, with a high certainty of reserve requirement cuts and interest rate reductions. Moreover, in a low-interest-rate environment, safe assets are still scarce, so the short-term risk in the bond market may not be significant. Future risk points in the bond market need to wait for incremental policies to be implemented and subsequent verification of fundamental indicators. If the fundamentals improve beyond expectations, market volatility and adjustments might increase, and attention can be paid to trading and allocation opportunities during such adjustments. The credit bond market is expected to follow the interest rate trend, and the credit bond spreads are anticipated to compress further.

Liu Yu, Chief of Macro Fixed Income at Huaxi, believes that the current pricing in the bond market is extremely unanchored, with Institutions' Hold Positions leading to an extreme elongation of durations, making the bond market prone to volatility. However, in the absence of external disturbances such as regulatory pressures, the incentive to realize floating profits accumulated by institutions this year is relatively weak, therefore significant fluctuations may occur in the bond market after the year ends.

In addition, despite some redemptions in bond funds in October, the annual inflow scale has been significant. Zhang Yangcheng, fund manager at the cash investment department of Penghua Fund, stated at the GTJA 2025 strategy conference that since 2018, factors such as the macro environment, investor demand, and bond investment strategies have collectively pushed bond Index ETFs into a phase of leapfrog development. This year, influenced by the strengthening bond market, long-term and ultra-long-term bond ETFs have grown rapidly. Taking Penghua as an example, the scales of the 5-year land debt ETF and the 0-4 year land debt ETF, which are respectively positioned as medium to long-term bond ETFs and MMF tools, have increased significantly.

Returning to the allocation of bond varieties, Zhang Yangcheng stated that the current selection of bond ETFs is already quite abundant. Besides implementing macro asset allocation strategies through bond ETFs, significant returns can also be achieved through the rotation of low-risk bond ETFs. On this basis, evaluating the relative value of bonds of different durations, varieties, and types through historical spread levels allows for variety rotation, effectively improving portfolio performance under low-risk situations while mitigating certain risks related to individual bonds' credit and liquidity.