- China's interbank bond market showed mixed trends on Monday, as the peace agreement between the US and Iran led to a decline in international crude oil prices, cooling inflation expectations and causing a slight drop in long-term government bond yields.
- The tight balance of domestic liquidity has not improved, with high overnight funding costs putting pressure on short-term government bonds, causing yields to rise and the curve to flatten passively.
- The market is focusing on the upcoming 2026 Lujiazui Forum, scheduled for June 17-18, anticipating new macroeconomic and financial policy signals from the National Financial Regulatory Administration (NFRA).
Easing Geopolitical Tensions Lead to Oil Price Decline
Driven by the announcement of a peace agreement between US President Trump and Pakistani Prime Minister Shahbaz, the international commodity market sentiment has significantly corrected, with crude oil prices retreating from high levels. The temporary easing of geopolitical risks has directly weakened global inflation premiums, providing external momentum for China's long-term bond market. The latest transaction of the 30-year special government bond 2600002 in the interbank market was at 2.222%, down 0.5 basis points from the previous day's close; the 10-year active government bond 260010 was last traded at 1.74%, down 0.2 basis points from the previous day's close. The general decline in long-term bond yields reflects a slowdown in market concerns about future long-term inflation pressures.
Tight Funding Conditions Constrain Short-Term Performance
In contrast to the recovery trend of long-term bonds, short-term government bonds are significantly constrained by the marginal liquidity of the domestic money market. According to feedback from several bank and brokerage traders in Shanghai and Beijing, overnight funding costs in the interbank market remain high, with no substantial improvement in the difficulty and cost of non-bank institutions obtaining funds. Major financial institutions maintain a cautious attitude towards lending, resulting in insufficient follow-up buying interest for short-term bonds. As a result, the yields on one- to three-year short-term government bonds have risen by 0.25 to 0.75 basis points overall, with short-term pressure pushing the government bond yield curve to flatten passively.
Equity Market Recovery Creates Risk Diversion
Against the backdrop of significantly eased Middle East tensions, Asian risk assets have generally been boosted. China's stock market, represented by the Shanghai Composite Index (000001:SH), rose in early trading on Monday, following the upward trend of major Asia-Pacific stock indices. The rise in risk appetite in the equity market has created some diversion pressure on bond market funds. Traders pointed out that the current market risk appetite is undergoing a marginal shift, with the rise in the stock market contrasting with the correction in the commodity market, suppressing the overall momentum to chase highs in the bond market, and leading to more frequent switches between allocation and trading positions by institutions.
Cautious Market Amid Policy Vacuum
Although external geopolitical factors have catalyzed a short-term improvement in the situation, the fundamental macro variables within the domestic bond market have not undergone a trend reversal. The market is currently in a relative policy vacuum, with the previous rise in yields having partially released technical adjustment pressure. A bank trader in Central China believes that in the absence of further easing of funding conditions by the central bank or the introduction of clear incremental monetary policies, the bond market is likely to continue its range-bound pattern in the short term. If liquidity tightens marginally in the future, short-term bond yields may face further upward risk.
Lujiazui Forum Policy Expectations in Focus
The market is currently focusing on the upcoming 2026 Lujiazui Forum to be held in Shanghai on June 17-18. This forum will be co-chaired by Ding Xiangqun, Director of the National Financial Regulatory Administration (NFRA), and the Mayor of Shanghai, with Ding Xiangqun attending the opening ceremony and delivering a keynote speech. With the forum approaching, market participants have high expectations for whether senior officials will release new macro-control, financial regulation, and liquidity support policies. Before specific policy announcements are made, the marginal changes in interbank liquidity are expected to remain the core variable determining short-term fluctuations in the bond market.
