End-of-quarter positioning battles with imported inflation: China's bond market yield curve shows a bull steepening trend
On Monday, the Chinese bond market exhibited a unique "inflation immunity" characteristic. Amid global energy price volatility due to escalating US-Iran tensions, domestic bond yields decreased rather than increased, particularly with a significant decline in short-term rates, showing a clear bull steepening trend by the end of the quarter. As of the midday close, the 2-year, 5-year, and 10-year government bond futures contracts rose between 0.04% and 0.08%, while the long-end 30-year contract performed even better.
Industry chain transmission: The pricing logic of Chinese bonds under high oil prices
From the industry chain transmission perspective, high oil prices affect domestic price levels through imported channels, but their marginal impact on the bond market is diminishing. According to Caitong Securities fixed income team, the current bond market pricing of "oil inflation" is relatively adequate. High oil prices are transmitted from PPI to CPI on one hand, while on the other, they may squeeze profit margins in downstream manufacturing, further weakening long-term total demand. This "short-term bearish, long-term bullish" logic leads investors not to blindly sell bonds at $115 oil prices but rather to focus on the long-term core contradiction of weak domestic fundamentals.
Competitive landscape: Institutional positioning forces and end-of-quarter effect
As late March arrives, competition for allocation among bank wealth management and insurance institutions reaches a fever pitch. The unexpected liquidity ease at the end of the quarter provides a favorable environment for leveraging arbitrage. Data shows that the 1-year government bond yield has fallen to 1.20%, reflecting the supply-demand imbalance in short-term instruments amid the return of wealth management funds and a subscription rush from non-bank institutions. This concentration of allocation forces temporarily suppresses the external exchange rate pressures brought about by reduced expectations of Federal Reserve rate cuts. Market institutions generally expect that as the issuance plan for special government bonds becomes clear in the second quarter, the long-end bond market will enter a spread compression trend, with the 30-year government bond yield target possibly pointing to 2.20%.
