Small and medium-sized banks are seeing their liability advantages weaken, and the deposit diversion effect is diminishing, which constrains their demand for bond allocation.
In recent years, the banking sector's "good start" period has presented a pattern of "large banks lending, small banks buying bonds." Although current bond market volatility has intensified, institutions generally believe that the bond-buying trend among small and medium-sized banks will continue, but the underlying logic is quietly changing. The model of "attracting high-interest deposits to match long-term bonds" is gradually decreasing, with allocation behavior becoming more cautious.
Several interviewees pointed out that, on one hand, the weakening liability advantages of small and medium-sized banks and the reduction in the deposit diversion effect constrain bond allocation demand. On the other hand, increased bond market volatility and narrowed capital gain opportunities are forcing banks to shift towards stable allocation. Referring to patterns from previous years, it is expected that rural commercial banks' bond buying will concentrate in February to March, with net purchases increasing month by month.
Institutions expect the bond-buying inertia of small banks to continue. In the past, the "good start" period often featured a situation where "large banks lend, and small banks buy bonds." Credit supply and demand tables for large and medium-sized Chinese banks disclosed by the central bank show that since June 2024, the bond investment balance of small and medium-sized Chinese banks has climbed for 11 consecutive months, reaching 46.41 trillion yuan by the end of May 2025.
Although recent bond market performance has been relatively volatile, several institutions believe the bond-buying trend among small banks will persist during this year's "good start" phase.
Ni Jun, Chief Banking Analyst at GF Securities, pointed out that on the asset side, the loan proportion of large banks is increasing, while that of other banks is declining; the pattern of small and medium-sized banks buying bonds and experiencing weaker asset growth is expected to continue.
Liu Jie, an analyst at Tianfeng Securities, analyzed that in recent years, the deposit-loan spread of rural commercial banks has continued to grow significantly in the first quarter, with relatively ample and stable intraday liquidity. As the pattern of "weak credit, strong deposits" deepens, the first-quarter deposit-loan spread for rural commercial banks remains high. Furthermore, the Spring Festival period, when migrant workers return home, brings a large influx of retail time deposits, leading to relatively stable intraday liquidity in the first quarter. To avoid income loss from idle funds, rural commercial banks tend to invest heavily in bonds on the secondary market to boost performance and often extend duration to obtain higher coupon income to cover liability costs and increase profits.
Wind data shows that in the first quarter of the past two years, the proportion of net purchases of interest rate bonds with maturities over 7 years by rural commercial banks has been rising.
Liu Jie further added that during the "good start" period, small banks face passive increases in liability costs, leading to a strong desire to speculate on capital gains by allocating long-term bonds. At the year-end and beginning of the year, deposit competition between large and small banks is typically intense, with small and medium-sized banks often temporarily raising deposit rates by intensively launching products like large-denomination certificates of deposit (CDs) and special CDs. This results in significant upward pressure on the liability costs of small banks, especially rural commercial banks, early in the year, and can easily lead to an "inversion" where deposit rates exceed government bond coupon rates. With coupon income weakened, small banks have a stronger incentive to speculate on capital gains by allocating long-term bonds.
A recent Yicai report also mentioned that a number of small and medium-sized banks temporarily raised large CD rates during the "good start" period, with active cross-bank deposit transfers, corroborating the above judgment from the side.
The logic of "attracting deposits to allocate bonds" is weakening. The market generally believes that the net bond purchase intensity of small and medium-sized banks during this year's "good start" period may be weaker than in the same period in 2025, and the model relying on "high-interest deposit gathering matched with long-duration bonds" is facing adjustment.
On one hand, the deposit attractiveness of small and medium-sized banks has declined, imposing some constraint on bond allocation demand. Recent visits by Yicai reporters to several small and medium-sized banks found that the interest rate gap for large CDs between some small/medium banks and large banks is narrowing, or even becoming comparable; the phenomenon of attracting cross-city deposits through interest rate differentials has significantly decreased. Early this year, many small and medium-sized banks turned to non-price methods like material rewards and point-based activities for deposit gathering.
Liu Jie pointed out that after multiple significant deposit rate cuts at small banks in 2025, their pricing advantage has weakened, and the deposit diversion effect from large and joint-stock banks is also expected to diminish. Furthermore, under pressure on interest margins, the previous trend of "increasing volume and high prices" for high-interest large CDs is unlikely to reappear. Therefore, it is expected that the absorption intensity of general deposits by rural commercial banks during the 2026 "good start" period may not match previous years.
On the other hand, the bond market environment has changed, making it difficult for small banks to speculate on capital gains by matching high-interest deposits with long-term bonds. In 2025, after two years of a bond bull market, the market entered a volatile phase. Wind data shows that the 10-year government bond yield rose by approximately 25 basis points last year, climbing to 1.852% by year-end. Reviewing the annual trend: In mid-January 2025, liquidity began to tighten, coupled with a strengthening equity market, putting pressure on bonds leading to a correction; Starting in March, as the liquidity environment improved, the market gradually recovered; In April, influenced by changes in tariff expectations, market movements accelerated and became more volatile; Entering the second half of the year, the equity market strengthened again, significantly weakening the profit-making effect in the bond market.
Looking at third-quarter financial reports, rising bond market interest rates led to unrealized losses on bond assets held by many banks, thereby dragging down non-interest income measured at fair value.
Data from Enterprise Early Warning shows that among 42 A-share listed banks, 8 banks saw year-on-year declines in investment income for the first three quarters, with decreases ranging from 1% to 18%.
A director from a leading asset management institution told Yicai that most institutions currently hold a generally cautious attitude towards the 2026 bond market, which contrasts with the bull market environment of 2023-2024. He expects bond market volatility may increase after entering 2026, and market expectations for interest rate cuts have already been largely digested early in the year.
"Currently, considering both regulatory stance and market expectations after a year of adaptation and adjustment, it is expected that long-term interest rates will find it difficult to resume a one-sided downward trend," Liu Jie noted. This implies that the intensity of rural commercial banks' purchases of long-duration interest rate bonds in the first quarter of 2026 might slow down compared to the first quarter of 2025.
How will the future trend unfold? A Tianfeng Securities research report indicated that if the equity market is relatively strong in the first quarter of 2026, bonds, as a "weaker asset," might lead small banks' market strategies to be more based on allocation needs, favoring Amortized Cost (AC) or Other Comprehensive Income (OCI) accounting to capture coupon income, with weak trading momentum.
A source from the financial markets department of a small or medium-sized bank told Yicai that in this environment, the bond investment strategies of small and medium-sized banks will tend to be more conservative, primarily aiming to "hold to maturity and obtain coupon income." The AC and OCI accounting categories typically correspond to allocation-type holdings in bank trading strategies, aimed at reducing the impact of market value fluctuations on current profit and loss.
Liu Jie believes that, referencing past patterns, rural commercial banks' bond buying is expected to concentrate in February to March, with net purchase intensity increasing monthly. The 2026 Spring Festival falls on February 17th. Considering the property purchase and consumption demands during the migrant workers' return home for the festival, the peak period for concentrated deposit回流 is expected from late January to mid-February. Therefore, the deployment of funds by rural commercial banks for bond purchases is also likely to commence mainly in February. Following past patterns, net purchase intensity tends to increase month by month in the month containing the Spring Festival and the subsequent month.
Some institutions also believe the allocation process has already quietly begun. Zhou Guannan, Co-Director of the Research Institute at Huachuang Securities, pointed out that as the main配置 force in the interest rate bond market, banks, supported by factors like liability-side "good start" performance and indicator optimization at the beginning of 2026, continued their trend of increasing allocations to existing bonds like government bonds and policy financial bonds.
Zhou Guannan further analyzed that this is mainly based on three reasons: First, concentrated deposit growth at the beginning of the year and strong liability-side funds during the "good start" lead banks, under the principle of "early allocation, early收益," to prefer locking in annual coupon income early. Second, regulatory adjustments to the shock parameters for banks' EVE (Economic Value of Equity) indicators in 2026 indirectly eased the duration pressure on banks increasing allocations to medium- and long-term government bonds. Third, considering this year's volatile bond market, banks might prefer directly配置 by redeeming funds and other externally managed products to lower allocation costs.
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