- The yield on Chinese interbank government bonds slightly declined on Tuesday, mainly supported by weaker-than-expected macroeconomic data for May and the central bank's increased liquidity injection through reverse repos. The yields on 10-year and 30-year government bonds fell to varying degrees.
- In May, the total retail sales of consumer goods fell by 0.6% year-on-year, marking the first negative growth since December 2022. Meanwhile, the decline in fixed asset investment from January to May expanded to 4.1%, prompting a reassessment of the momentum for fundamental recovery, and somewhat restoring bullish sentiment in the bond market.
- On Tuesday, the People's Bank of China conducted a 4.495 billion yuan reverse repo operation, achieving a net injection of 2.965 billion yuan in a single day, marking the eighth consecutive trading day of net open market injections. Traders generally believe that the probability of a significant rise in current funding rates is low, and the willingness to enter the market for allocation is slowly increasing.
Weak Economic Data Reshapes Fundamental Support
The latest data released by the National Bureau of Statistics of China shows that the industrial output above a designated size increased by 4.5% year-on-year in May, falling short of some institutional expectations. At the same time, the total retail sales of consumer goods fell by 0.6% year-on-year, marking the first negative value since December 2022. The decline in fixed asset investment in the first five months further expanded to 4.1%, recording the largest drop in nearly six years. The weakening of these macroeconomic fundamentals indicates that the momentum for real economic recovery still faces certain pressures, prompting asset management institutions to revise their previous optimistic expectations, with safe-haven funds regrouping in the bond market, providing core support for spot bond prices.
Central Bank's Continuous Net Injection Eases Liquidity Concerns
To manage liquidity and stabilize mid-year funding fluctuations, the People's Bank of China continued to intensify its operations in the open market on Tuesday, conducting a 4.495 billion yuan 7-day reverse repo operation. Due to the low maturity amount on the day, the net injection scale reached 2.965 billion yuan in a single day. This marks the eighth consecutive trading day of net injections in open market operations. The recent trend of increasing daily reverse repo operations has effectively calmed the previously cautious market sentiment due to the rebound in short-term funding prices. Currently, the overnight repo rate in the interbank market is operating above 1.4%, with most traders expecting limited room for further significant upward movement.
Slight Decline in Spot Bond Yields Reveals Allocation Value
Driven by the dual benefits of weak fundamentals and the central bank's liquidity support, the yields on major government bonds of various maturities in the interbank market slightly declined. Among them, the latest transaction of the 30-year special government bond 2600002 was at 2.2175%, down 0.4 basis points from the previous trading day's close; the latest transaction of the 10-year active government bond 260010 was at 1.7375%, down 0.3 basis points from the previous day's close. Some traders from securities firms and wealth management subsidiaries pointed out that the bond market's risk pricing for the previous phase of liquidity tightening has become relatively sufficient. At the current absolute yield levels, the cost-effectiveness of long-term institutional allocation has improved compared to before, and the willingness to gradually build positions is slowly recovering from low levels.
Short-term Volatility Pattern and Multiple External Variables
Although the fundamentals are favorable and the central bank's stance is relatively moderate, concerns about medium-term liquidity have not been completely dispelled, making it unlikely for yields to experience a breakthrough decline in the short term. Instead, they are more likely to maintain a volatile pattern of long and short positions. In terms of trading strategies, most institutions still prefer to adopt a band operation approach. If volatility in overseas markets intensifies or if there is a shift in the monetary policy expectations of major global central banks, it could potentially disrupt cross-border capital flows and bond market sentiment domestically. Additionally, the market is closely watching the upcoming 2026 Lujiazui Forum in Shanghai. If new signals regarding financial regulation or monetary control are released during the keynote speech at the opening ceremony, market pricing may face reevaluation.
