The market is primarily driven by domestic fundamentals and liquidity conditions. Recent economic and financial data releases appear to have provided a further boost to the already strengthening Chinese bond market. Since the beginning of the week, government bond yields have continued their downward trend from last week, with 30-year bonds exhibiting particularly intense activity amidst broad liquidity and shifting expectations regarding special bond supply. On April 15th, the yields on 10-year and 30-year government bonds fell to 1.774% and 2.277% respectively, nearly returning to levels seen before the attack on Iran. Institutions widely believe that concerns over imported inflation stemming from the Middle East situation have significantly eased, reducing their disruption to the domestic bond market, while bullish forces have noticeably increased. Conversely, the yield on the 10-year U.S. Treasury note, often considered the anchor for global asset pricing, continues to climb, as its safe-haven appeal weakens amid inflation worries, geopolitical tensions, and supply-demand imbalances. Several bond market participants indicated that the Chinese bond market is more influenced by domestic factors, with its safe-haven characteristics becoming more prominent recently. Analyzing the main bullish and bearish forces, they suggest that given the current trends in credit and total social financing, institutional buyers like banks and insurance companies lack strong momentum for a sustained bearish turn. Meanwhile, trading-oriented players such as funds and securities firms are also shifting towards a more bullish stance.
Inflation Worries Subside as a Disruptive Factor On the 15th, although ultra-long-term bond futures experienced a slight pullback, spot bond yields in the interbank market continued to decline. At the close, most government bond futures were higher. The 30-year contract fell 0.04% to 112.970, while the 10-year contract rose 0.07% to 108.580. The 5-year contract gained 0.08% to 106.135, and the 2-year contract increased 0.04% to 102.556. Yields on major interest rate bonds in the interbank market generally declined. At the time of writing, the yield on the active 30-year bond "26附息国债02" was down 0.2 basis points (BP) at 2.277%. The yield on the 10-year bond "26附息国债05" fell 0.6 BP to 1.7740%. The decline was more pronounced at the short end, with the 1-year yield down 2.75 BP, and the 2-year and 5-year yields falling 1.75 BP and 1.5 BP respectively. Since last week, the recovering bond market has entered a phase of even stronger performance, with ultra-long bonds being particularly frenzied. From last Friday (April 10th), the yield on the 10-year bond "26附息国债05" has cumulatively decreased by 4 BP, breaking below the 1.8% threshold on Monday (13th). The yield on the 30-year bond "26附息国债02" has cumulatively fallen by 6.3 BP, plunging 9.3 BP from a recent high of 2.37% over the past week. Fundamentally, against a backdrop of still-recovering domestic demand and easing imported inflation concerns, first-quarter macroeconomic performance has become the dominant factor driving this bond market recovery. Better-than-expected liquidity conditions across the quarter-end have provided crucial support from the liquidity side. Recent inflation data for March released by the National Bureau of Statistics did not significantly exceed expectations, further alleviating concerns about rising inflation and subsequent monetary tightening. Relatively weak financial data and export figures are also seen as key contributors to this trend. "Following the confirmation of inflation data, credit and social financing data provided a secondary confirmation of the first quarter's fundamental strength. Although proactive monetary easing led to a rebound in M2 growth, the growth rates of both total social financing and credit actually declined. Since the start of the year, underwhelming credit issuance plans have pushed bonds that were 'hard to short' into a configuration-driven bull market. The logic for a pullback in long-end yields has gradually become 'perfect' amid expectations surrounding inflation, supply-demand dynamics, and a property market recovery," analyzed Lü Pin, Chief Fixed Income Analyst at Zhongtai Securities. He added that after the weakening of supply-demand factors, medium- and long-term bonds already have holding merit, and the fundamental narrative may gradually gain catalytic verification.
Why the Frenzy for Ultra-Long Bonds? Currently, discussions about the bond market "returning to 2024" are increasing, and forecasts for the levels of a new "bond bull market" are becoming more optimistic. Sun Binbin, Chief Fixed Income Analyst at Caitong Securities, analyzed that in this round, the 10-year bond yield could potentially fall to 1.7%, and the 30-year yield might reach 2.15%, emphasizing that "the process may be曲折 (tortuous), but the outcome is promising." Lü Pin's expectations are even more optimistic. He predicts that the 10-year bond yield could decline to 1.6% for the full year. In the second quarter, the 30-year bond is expected to see its lowest point for the first half of the year, potentially around 2.1%–2.15%, and could fall to 2.0%–2.1% for the full year. The most notable feature of this rally is the "frenzied buying" of ultra-long bonds, leading to a narrowing term spread and a flattening yield curve. Recent market performance suggests that expectations for this long-end catch-up and curve flattening are continuously strengthening. The fixed income team at Shenwan Hongyuan pointed out that money market rates and liability flows have become the core矛盾 (contradiction) dominating the bond market. So, against a backdrop of persistently loose liquidity, who is buying and who is selling? "From trading behavior, trading desks (funds and securities firms) have recently increased their allocations to long and ultra-long bonds, while配置盘 (allocators) like insurance companies and banks have been net sellers to some extent. This indicates that some long-duration筹码 (chips) are transferring from allocators to traders," the Shenwan team believes. They suggest that despite potential liquidity tightening during the April tax period, a significant tightening is unlikely, and the probability of carry trade spreads turning negative is also low. Overall market sentiment remains bullish, with the logic of compressing spreads continuing to play out. Opportunities are concentrated in long and ultra-long bonds, with limited room for movement in tenors within 10 years. Sun Binbin believes, "Since the start of the year, only securities firms and insurance companies have been net sellers in the secondary market. Against the backdrop of负债超预期 (liabilities exceeding expectations), bearish forces were already weak. Looking ahead, as long as the current trends in credit and social financing continue, allocators are unlikely to turn significantly bearish. Banks face an asset shortage, and insurance companies, while continuously reducing holdings of ultra-long bonds, also face some asset-liability matching pressure. Therefore, the focus is on trading desks like funds and securities firms." He further stated that funds did not reduce their ultra-long bond holdings in March, indicating stable liabilities. Moreover, with excessive crowding at the short end, there is still a necessity to speculate on capital gains through ultra-long bonds. From the perspective of securities firms, compared to 2024, there is still room for减持 (reducing holdings) of about 70 billion yuan. However, considering this isn't a unilateral downtrend where gradual profit-taking is typical, the logic for significant selling motivation is also lacking. The concentration of bond lending has started to decline from high levels, indicating a significant lack of micro-level bearish forces. However, the Shenwan fixed income team also cautioned that "money market rates and liability flows" could be a "double-edged sword." "Recently, loose liquidity and rapid subscriptions to bond funds by wealth management products have amplified bullish sentiment in the bond market. If there is actual liquidity tightening coupled with redemptions from wealth management products, the market could experience sharp volatility. But for now, the positive push outweighs the negative impact," the report noted.
Where is the True Safe Haven? "The Middle East situation has propelled Chinese government bonds into the ranks of safe-haven bonds," a recent Bloomberg research report pointed out. "Since the onset of the U.S.-Israel-Iran conflict, renminbi assets have demonstrated lower volatility, showing more pronounced safe-haven attributes." However, as the Middle East situation fluctuates, inflation expectations driven by energy prices continue to play out globally. In this context, the 10-year U.S. Treasury has not exhibited the traditional safe-haven function of such assets. Instead, it has been sold off alongside traditional havens like gold and the Japanese yen, with its yield rising significantly amidst volatility. Recently, influenced by indications from both the U.S. and Iran aiming to de-escalate, rising concerns about a U.S. economic slowdown, and shifting expectations for Federal Reserve rate cuts, U.S. Treasury yields have begun to pull back and correct, but the trend remains unstable. The latest data shows the U.S. 10-year yield remains around 4.26%; although it retreated recently, it briefly climbed to 4.3% during the session. Many institutional participants believe that, amid concerns about sticky inflation, U.S. Treasury yields lack the momentum for a significant decline. Has the traditional safe-haven function of U.S. Treasuries failed? The foreign exchange team at CICC Research selected four representative geopolitical risk events – the 1990 Gulf War, the 2022 Russia-Ukraine conflict, the 2026 Greenland incident, and the 2025 "reciprocal tariffs" – and stated that U.S. Treasuries tended to weaken during most of these conflicts, not demonstrating safe-haven characteristics. The report further indicated that although the current geopolitical conflict caused oil prices to rise, long-term inflation expectations have not significantly increased. Conversely, expectations for Fed rate cuts have been perturbed by short-term energy prices. This has led to an increase in real interest rates, as represented by the 10-year U.S. Treasury Inflation-Protected Securities (TIPS) yield, following the conflict, rather than a decrease. The report stated that U.S. Treasuries are excellent safe-haven assets when facing "demand-side shocks" (like economic recession or financial crisis). However, when the market faces "supply-side shocks," the purchasing power of nominal bonds is eroded by inflation, and investors demand higher risk premiums, leading to selling pressure on U.S. Treasuries. Although an escalation in geopolitical conflict might raise risks of economic stagflation, in the initial stages of a conflict, "demand-side shock" is typically not the main market narrative. "Geopolitical conflicts triggered by U.S. government policy uncertainty, such as 'reciprocal tariffs' and the Greenland incident, have a relatively greater impact on the credibility of U.S. Treasuries, thereby weakening their safe-haven attribute. The U.S. financial market even experienced a brief period of simultaneous declines in stocks, bonds, and the dollar," analyzed the CICC Research foreign exchange team. They concluded that the Gulf War and the U.S.-Israel-Iran conflict pushed up oil prices in the short term, leading to increased inflationary pressure and expectations for Fed tightening, which consequently results in rising U.S. Treasury yields and falling prices.
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