According to Caixin on December 10 (Editor: Yang Bin), after a sharp drop yesterday afternoon, this morning, the yield on the active 10-year government bond continued to fall significantly, declining by as much as 5BP at one point, and currently has broken below 1.86%. From the behavior of institutions, there are profit-taking sell-offs. At the same time, the liquidity situation has not significantly loosened, and some institutions have pointed out to pay attention to the central bank's attitude and operations regarding long-term bonds.

There have been profit-taking sell-offs, and the liquidity situation has not significantly loosened.

According to data obtained from Caixin on December 9 regarding institutional behavior, last week, city commercial banks and rural commercial banks that sold government bonds joined the ranks of bond buyers. In particular, rural financial institutions net purchased government bonds worth 10.922 billion yuan on December 9, covering all maturities, with 6.17 billion yuan bought in the 20-30 year range. City commercial banks and insurance companies purchased government bonds worth 1.251 billion and 2.986 billion yuan, respectively.

Last week, the two major buying forces showed differentiation on December 9. Large banks continued to buy government bonds worth 14.67 billion yuan, mainly concentrated in maturities of 3 years or less. Meanwhile, fund companies took profit on December 9, selling government bonds worth 5.643 billion yuan, mostly in the 7-10 year range.

Some traders pointed out that considering the current certificate of deposit interest rates have not yet declined, the current bonds may be subject to some excessive speculation. If the central bank maintains cautious liquidity provision, the support from the allocation side may be relatively limited. Even if the futures market sees a rebound in the early trading of the next day, the mid-term decline in interest rates may also be hindered.

In fact, since December, the liquidity situation has not significantly loosened. The weighted average of DR007 reached a low of 1.60% on December 4, but then rose significantly, climbing up 11.64BP yesterday to close at 1.7790%, and it has now risen above 1.80%. DR001 once exceeded 1.50%.

Last week, the central bank conducted a net withdrawal of 1132.1 billion yuan in the open market. Today, the central bank conducted a 141.6 billion yuan 7-day reverse repurchase operation, with a winning bid rate of 1.50%, resulting in a net injection of 90.3 billion yuan, ending a series of days of net withdrawal.

Zhou Guannan, the Chief of Fixed Income at Huachuang Securities, pointed out to pay attention to the central bank's attitude and actions regarding long-term Bonds. Since April 2024, when the 10-year government Bonds are below OMO + 50bp, the central bank frequently signals alerts regarding long-term Bonds risks. When the 10-year government Bonds fall below OMO + 45bp, the central bank usually intensifies management efforts or conducts Trade in Bonds.

The bond bull market will not end easily.

The FICC team of China Zheshang Bank pointed out that an overly consistent expectation in the short-term rhythm may bring some profit-taking pressure, but overall, before there is a clear signal indicating a reversal of the macro cycle, the process of the bond bull market will not end easily.

Based on yesterday afternoon's sharp drop, this morning, the yield rate of the 10-year government Bonds continued to decline significantly, dropping up to 5BP to 1.8550%. As of 11:30, the yield rate of the 10-year government Bonds was 1.8560%.

Figure: Today's intraday yield chart of the 10-year government Bonds.

(Source: Choice Data, organized by Financial News.)

In the short term, the price of funds is key in affecting the bond market's trend. Zhang Wei, the Chief of Fixed Income at China Merchants, pointed out that although the liquidity will seasonally tighten in mid to late December, the impact on long-term Bonds is controllable, while the decline in short-end interest rates may face obstacles, and the yield curve is expected to flatten.

Mao Hongjun, the organizer of the well-known bond market public account Debt Market Red Army Notes, believes that a turn in monetary policy represents a response to next year's domestic and foreign pressures, reserving greater monetary policy space. Next year, a more relaxed monetary policy may be implemented, with interest rate cuts and reserve requirement ratio reductions possibly exceeding this year's, which will also open up downward space for bond market yields. It is expected that the 10-year government Bonds might have at least 20-30bp of downward space.

Regarding the monetary easing measures for 2025, Chief Fixed Income Analyst Sun Binbin from Tianfeng believes that the interest rate cut may be around 50bp, with a potential reserve requirement ratio reduction of up to 1.5%, or more forceful implementation of buyout reverse repos and purchasing government bonds. In terms of bond market positioning, based on the above assumptions, it is determined that the overnight funding rate will be around 1.0% to 1.2%, the 10-year government bond range will be 1.5% to 1.7%, and the 1-year AAA interbank certificate of deposit range will be from 1.35% to 1.5%.