According to Xinhuanet on December 14 (Editor: Yang Bin), shortly after the 10-year treasury yield historically broke below 2.0%, this morning, the 30-year government bond yield fell more than 4BP at times, also dropping below 2.0%.

On social media, traders jokingly referred to bonds as the "war god" of the market. The speed of decline in interest rate bonds has exceeded expectations of many industry insiders, "having completed next year's journey by the end of the year." As of 11:30, the 10-year treasury yield fell 4.30BP to 1.7650%, and the 30-year treasury yield just touched 2.0%. Short-term government bond yields fell even more, exceeding 6BP.

Figure: Government Bond Market Matrix

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

From the perspective of institutional behavior, configuration funds such as insurance have recently joined in the rush to buy bonds. Last night, the central economic work conference's communiqué expressed a more positive view on monetary policy, with industry insiders expecting the possibility of a reserve requirement cut before the end of the year. The cross-year trend in the bond market may have entered an accelerated phase, with pullbacks presenting buying opportunities, and profits not easily taken.

Trading volume is being churned, and after configuration volume is on the rise.

In the past week, despite frequent profit-taking operations on government bonds by funds, there is still a net purchase of long-term government bonds overall, and insurance institutions have also joined the rush to buy bonds.

According to data obtained by Caixin from the industry, Funds slightly reduced their holdings of bonds with maturities of more than 10 years last Friday (6th) and Wednesday (11th), but still bought 13.311 billion and 15.783 billion yuan of bonds with maturities over 10 years on Monday (9th) and Tuesday (10th) respectively. Insurance companies have been continuously purchasing bonds with maturities over 10 years recently, buying 14.067 billion and 2.52 billion yuan on Tuesday and Wednesday respectively.

In terms of Other increased holdings institutions, large Banks have maintained their buying of government bonds, primarily for maturities of less than 3 years. Rural Financial institutions have also shifted from selling to buying, acquiring 10.822 billion and 2.287 billion yuan of bonds maturing in 7-10 years on Tuesday and Wednesday respectively.

Looking back at the performance of ultra-long bonds since December, China Zheshang Bank's FICC believes that the market is mainly driven by trading volumes, with the allocation side being 'half a beat slow.' However, as the fear of high prices intensifies, the supporting power of rigid allocation has gradually emerged during the back-and-forth trading process, and the market may continue to oscillate along the script of 'rushing, taking profits, speculation, and continuing to rush.'

There may be a reserve requirement ratio cut before the end of the year, accelerating the year-end bond market trend.

On the evening of December 12, the central economic work conference communiqué was released. The meeting continued the tone from the Political Bureau meeting on December 9, stating, 'to implement a moderately easy monetary policy.' It specifically proposed 'to effectively utilize the dual functions of the total amount and structure of monetary policy tools, appropriately reduce the reserve requirement ratio and interest rates, and maintain abundant liquidity, ensuring that the growth of social financing and currency supply aligns with economic growth and price level expectations.'

Mao Hongjun, the head of the famous bond market public account 'Debt Market Red Army Notes,' indicated that the central economic work conference communiqué has expressed a more positive stance on monetary policy, which should lead to bullish pricing in the bond market. It is expected that the bond market will show oscillating bullish trends, and pullbacks can be used for increased positions.

Several Analysts have mentioned the possibility of a reserve requirement ratio cut before the end of the year. Zhang Xu, Chief of Fixed Income at Everbright Securities, predicts that there may be a reduction in the OMO rate by 20-30 bp in 2025, which will guide the actual interest rates on deposits and loans further downward, and a reduction in the reserve requirement ratio by about 1.5 percentage points, with the scale of net purchases of government bonds by the central bank significantly exceeding that of this year. Furthermore, there may also be a reserve requirement ratio cut of 0.25-0.5 percentage points before the end of this year, likely to be announced within this week.

Qin Han, Chief of Fixed Income at Zheshang Securities, expects that there may be a 50 bp reserve requirement ratio cut before the end of the year, and that the first quarter of 2025 will likely push for a reduction in interest rates, with the possibility of simultaneously cutting reserve requirements and interest rates again before the end of the year not ruled out.

The extent of monetary easing determines the long position space in the bond market, and as long as interest rate cuts are in progress, the bond market can remain optimistic. According to Sun Binbin, the chief of Fixed Income at Tianfeng Securities, it is expected that by 2025, the interest rate cut will reach or exceed 50 basis points, and the reserve requirement ratio may be reduced by 1.5%, or more forcefully implement outright reverse repos and buy government bonds. Based on this assumption, the overnight funding rate could fall to about 1.0% to 1.2%, and the range for 10-year government bonds would be 1.5% to 1.7%.

In terms of pace, the FICC team at China Zheshang Bank believes that the bond market's trading towards monetary easing has only just entered its first half, and attention should shift to more substantial trading as monetary easing becomes more apparent after the second quarter of next year, with market expectations transitioning towards policy effects and economic growth.

Qin Han believes that the bond market's cross-year trend has entered an accelerated phase, suggesting not to easily take profits and maintaining the determination of the 10-year government bond yield's fluctuation range at 1.6% to 2.1% for 2025.