- The yield on major tenors of Chinese government bonds in the interbank market rose slightly on Monday. This was due to the People's Bank of China (PBOC) continuing to withdraw medium- to long-term liquidity, maintaining a tight market funding environment. Despite two consecutive days of net injections in the open market, traders' concerns about the central bank's control over liquidity limited enthusiasm for buying bonds.
- The Shanghai Composite Index (000001:SH) opened sharply lower today but narrowed its losses amid fluctuations. However, the weak fluctuations in the equity market did not provide significant capital diversion benefits to the domestic bond market. Prices of ultra-long and key tenor government bonds were collectively under pressure, with a gradual increase in profit-taking intentions in the market.
- Institutional analysis indicates that the current spread on ultra-long bonds has a certain appeal, but it faces dual constraints of uncertain supply-demand environment and tightening funding conditions. If subsequent macroeconomic data moderately recovers or credit demand remains weak, government bond yields are likely to maintain a volatile situation near key interest rate points.
Large Net Injections in Open Market Fail to Ease Liquidity Concerns
The People's Bank of China conducted a 7-day reverse repo operation of 218.5 billion yuan today, fully meeting the needs of primary dealers, with the winning bid rate remaining at 1.40%. Due to the small amount maturing on the day, the open market achieved a net injection of 207.5 billion yuan in a single day, marking the second consecutive day of net capital injection in the open market. However, after last week's policy adjustment where reverse repo operations were temporarily halted, the interbank market has gained a deeper understanding of the management's determination to prevent capital idling. An investment manager at a Shanghai brokerage stated that although the current operations do not signify a fundamental shift in monetary policy, the trend of the funding environment returning from high levels to normal is very clear. The timing of funding tightening this month is noticeably earlier than usual, and the central bank's absolute control over liquidity has somewhat dampened short-term bullish sentiment.
Key Tenor Government Bond Yields Rise Across the Board
Under the pressure of a persistently tight funding environment, the yields on major active bonds in the Chinese bond market showed a slight upward trend on Monday. As of this morning, the latest transaction of the 30-year special government bond (2600002:CN) in the interbank market was at 2.206%, slightly up by 0.11 basis points from the previous day's close; the latest transaction of the 10-year government bond active bond (260005:CN) was at 1.724%, up by 0.4 basis points from the previous day's close. Analysts pointed out that after the open market's single-day reverse repo operation fell to a minimal 2 billion yuan at the beginning of the month, last week saw the first halt since August 2024, sending a strong warning signal to the market. If subsequent funding prices continue to approach the policy rate of 1.40%, the most abundant liquidity phase may have passed, and there will be more noticeable volatility and profit-taking pressure near key interest rate points.
Wide Fluctuations in Equity Market Do Not Create Bond Market Benefits
Amid significant adjustments in major global stock markets, the Shanghai Composite Index in China also opened sharply lower by 2.2% today. Subsequent bullish capital intervention narrowed the decline to within 1%, attempting to regain the 4000-point threshold. However, near the end of the morning session, the index again came under pressure and fell below this threshold. Despite the overall weak performance of the stock market, the traditional teeter-totter effect with the bond market did not manifest. Market traders reported that the core concern for investors remains the marginal tightening of the funding environment. If core inflation rebounds or economic data in late June significantly exceeds expectations, liquidity premiums may be further reassessed, thereby suppressing bond prices.
Institutions Focus on Low Odds Volatility and Band Strategy
The latest report from the fixed income research team at Founder Securities pointed out that although there are short-term fluctuations in the funding environment, under the macro background of moderate recovery in fundamental expectations and overall weak credit demand, it is expected that liquidity will not experience a trend of significant tightening. The central bank will still adhere to the bottom line of reasonably ample liquidity. The fixed income research team at Huatai Securities believes that the core contradiction in the current bond market lies in the collision between bullish inertia and low odds. Currently, the win rate of the 10-year government bond at the 1.70% position is relatively average, and if it rises close to 1.80% in the future, the value of the game will increase. Institutions suggest that investors should focus on the rhythm of bond supply, changes in the funding environment, and management's operational signals, adopting a short band operation strategy near the 2.20% level for the 30-year government bond.
