After breaking through the key level, what’s next for the bond market?
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The 10-year government bond yield forcefully broke below the critical psychological threshold of 1.75%, and the 30-year government bond yield fell to around 2.25%—this is a concentrated eruption after three weeks of sustained strength in the bond market, an inevitable result of extremely loose liquidity and institutional “asset shortage” logic resonating.
The underlying support for this round of market movement is clear: extremely loose liquidity (DR001 operating around 1.2%), continuous net inflows into wealth management and bond funds forming a positive feedback loop, supply-side uncertainty clearing as the ultra-long special government bond issuance plan becomes clear, bill rates falling more than seasonally (October national share bank bill rediscount rate down to 0.79%) evidencing continued weak credit demand.
But the latest research reports from Huatai Securities and China Post Securities both issue warnings: in the short term, market inertia remains, and overall risks are controllable for the next 1-2 weeks; but the “smoothest phase” is nearing its end, spread compression is entering its latter stage, room is gradually narrowing, and medium-term risk is quietly accumulating.
Both brokers point out, the driving force behind this round is the trading account represented by public mutual funds “carrying the sedan chair,” rather than the active entry of allocation accounts—this structural feature determines the inherent fragility of current levels.
The largest risk variable has flashed a yellow light: funding prices are breaching the central bank policy interest rate, approaching the lower limit of “policy rate minus 20BP”, and the central bank’s attitude becomes the sword of Damocles hanging over the market. Huatai Securities cautions that if DR001 rebounds to the 1.3%-1.4% range, significant volatility may ensue; China Post Securities bluntly states if funding price centers are forced to revert to policy rates in a pessimistic scenario, trading accounts may face mutual trampling.
Four Driving Forces of This Market Rally
Huatai Securities’ fixed income team systematically outlined four driving forces for this round in their April 22 research report.
First, sustained and extremely loose liquidity is the core support for this rally.
Since March, external uncertainty has increased, growth stabilization has become the policy focus, and the liquidity environment is moderately loose; the large-scale liquidity injection by the central bank at the beginning of the year, combined with net reductions in fiscal deposits of 616.5 billion yuan and 854.7 billion yuan in February and March, respectively, has significantly improved market liquidity; marginal weakening of credit demand is evident, with funds accumulating in the banking system; the lowering of bank liability interest rates and RMB appreciation boosting settlement demand have jointly pushed DR001 to operate around 1.2%. Huatai Securities summarizes this as “one force overcomes ten meetings”—extremely loose liquidity has overwhelmed all fundamentals and inflation disturbances.
Second, the trading account is an important driver of the rally.
Recently, wealth management and bond funds have continued to receive net subscriptions, resulting in significantly increased passive allocation pressure on non-bank institutions. Fund trading accounts have become the main buying force in the market, forming a positive feedback loop: capital inflows → yield decline → further increase in subscriptions. By comparison, allocation accounts are more cautious, banks mainly realize profits at low levels recently, and insurance allocation is weak.
Third, the landing of ultra-long special government bond issuance plan has cleared supply-side uncertainty.
Previously, the market worried about the scale, timing, and maturity structure of issuance. With clarity in the plan, suppressive factors have been eliminated, and net supply over the past two weeks has been limited, opening space for ultra-long-end yield declines. 20-year and 50-year ultra-long government bonds have been particularly remarkable in this round, with catch-up gains in the ultra-long end becoming a core feature.
Fourth, bill rates fell more than seasonally, with clear signals of weak credit.
In April, bill rates dropped sharply and ahead of schedule, with the October national share bank bill rediscount rate falling to 0.79%, breaking a new low for the year and below seasonal levels. Bill spreads versus government bonds and interbank CDs fell to -37BP and -62BP, respectively, pointing to average credit issuance in April and still weak momentum for economic recovery.
Structural Breakdown Behind Stock-Bond Rally
China Post Securities, in their April 20 research report, provided an independent explanation for the “stock-bond rally” phenomenon.
They note that while bond yields accelerated downward in April, tech and other equity sectors also rebounded simultaneously, diverging starkly from past correlation patterns. This divergence is not due to an overall repricing of risk, but more likely driven by short-term capital behavior—for example, concentrated allocation by “Fixed Income Plus” products.
The key judgment is that term spreads have not compressed. The bond market’s pricing of risk preference is shown in term spreads, not absolute yield levels. Currently, the 30 minus 10-year term spread has compressed only slightly, and the 10 minus 1-year term spread has even hit new highs. The most compressed is the spread between the 30-year active and inactive bonds (mainly reflecting institutions’ bets on bond switching and supply factors).
This means the essential characteristic of the current market is “overall yield curve downward shift,” not “term premium compression,” with high term premiums still pricing in late-stage inflation expectations and rising risk preferences.
China Post Securities further summarizes the dominant logic of this round: relatively loose bank liabilities drive funding prices and short-end yields continuously downward, with 1-year government bond yields already down to 1.16%, overnight rates near 1.2%, and the 7-day yield center below 1.4%; with the short-end in a “nothing left to buy” state, public mutual fund trading accounts actively extend duration, driving down yields at the long and ultra-long ends. Major banks’ allocation accounts still face ongoing ultra-long bond supply pressure, and the so-called “shorter issuance duration” is nothing more than a trading account “gimmick.”
How Much Downside? Two Brokers Offer Quantitative Judgments from Different Dimensions
Huatai Securities gives a clear quantitative assessment: the current 10-year government bond yield has broken previous lows, with limited room for further decline; if the 30-10 year term spread compresses below 45BP, there may be little room left; below 2.2% for the 30-year government bond, downside resistance will significantly increase.
Over the next 1-2 weeks, loose liquidity, momentum for bullish trades, and weak April data will continue to support the market, keeping overall risks controllable, but the “smoothest phase of the rally” is likely ending.
China Post Securities analyzes from the standpoint of the allocation versus trading account game: for the long and ultra-long end to fall further, allocation and trading accounts must interact, which isn’t very likely. Persistently high term premium means allocation accounts won’t rush to enter; if the long end continues to fall, its appeal to allocation accounts actually drops sharply.
Analysts believe this trading account-driven rally may run “a bit farther” than in February—because after the high deposit CD replacement in Q1, bank cost rates and FTP pricing likely both adjusted downward—but only “a bit.” Latecomers chasing may extend the trading rally and possibly see lower levels, but without sufficient allocation account support, persistently low yields won’t become a new rate center.
Risk Warning and DisclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific situation. Investment based on this is at your own risk. ```