- China's ultra-long term special government bonds made their debut this year. There was a divergence in the yields between the 20-year and 30-year bonds, with yields in the secondary market rising by about 1 basis point.
- Continued liquidity has driven the strength in short- and medium-term government bonds, with 10-year active bond yields falling to 1.737%. The yield curve has significantly steepened.
- Institutions remain cautious about allocating ultra-long duration assets. TF Securities noted that if narrow liquidity returns to neutral, long-term bonds might face upward repricing pressure.
Pricing Dynamics of Ultra-Long Term Special Government Bonds
China's bond market exhibited clear term differentiation on the initial day of the special government bonds. The demand for the 30-year ultra-long term bonds was generally better than for the 20-year bonds. According to Thomson Reuters, the yield for the 20-year and 30-year bonds showed an inverted phenomenon, with one high and one low. This was primarily due to the different levels of trading activity in the secondary market for the two terms. After issuance, cautious sentiment increased as the overall bid multiples were at average levels. The latest transaction for the 30-year special government bond 2500006 was at 2.258%, an increase of 1.05 basis points from the previous day; the 20-year ultra-long term special government bond 2500004 was at 2.18%, an increase of 1 basis point from the previous day.
Reshaping the Steepening Yield Curve
Contrary to the pressure on the long end, short- and medium-term bonds remained robust with ample liquidity. The latest transaction for the 10-year government bond 260005 was at 1.737%, down 0.8 basis points from the previous day. Traders in South China pointed out that the current market liquidity remains abundant, and bullish sentiment in the short end is hard to contain. This transformation in broad liquidity, leading to abundant narrow liquidity, makes short-term yields more sensitive to the liquidity conditions. The long end did not fully follow the strength from ample liquidity, further highlighting the steepening characteristic of the curve.
Liquidity Expectations and Institutional Trading Logic
The main trading theme in the current bond market is in a tussle between abundant liquidity and increased supply. TF Securities' fixed income research team believes that the market’s pricing of liquidity ease is relatively limited in sustainability. With no obvious tightening intentions from the PBOC, liquidity easing holds some resilience. If future policy focuses shift, and funding rates gradually seek a higher center, it could boost the supply of interbank certificates of deposit and suppress their demand for allocation. At that time, the upward fluctuations in funding rates will not only lead to adjustments in the short end but also amplify the valuation adjustment risk of ultra-long term government bonds in the secondary market.
