In a remarkable financial development, the yield on 10-year government bonds has hit a 22-year low, signaling a significant shift in the bond market landscapeAs of December 3rd, the futures for 30-year government bonds experienced a surge, rising by 0.5%, while the 10-year contract increased by 0.19%, and the five-year contract saw a 0.12% uptickThe active bond 240011, which pertains to the 10-year maturity, has yielded a record low of 1.97%. This marks an important milestone for the bond market as it moves below the 2% threshold, an occurrence last seen in April 2002.

The trend throughout this year has been a steady decline in the 10-year bond yields, reflecting a broader reduction in yields across various maturitiesThis decrease has been accompanied by a remarkable rise in the net asset values of Chinese bond funds, achieving historical highs

By December 3rd, the 10-year bond ETFs, short-term funding ETFs, government development fund ETFs, corporate bond ETFs, and urban investment bond ETFs all registered increases, reaching new all-time high closing prices.

The bond market's robust performance has raised concerns among investors about a potential short-term correctionAnalysts are divided on their outlooks, with different institutions providing varying interpretations regarding the bond market's volatility.

As reported, the significant bond market rally on December 2nd was accompanied by diverse responses from several investment firmsFor instance, Huacan Fund has attributed this downturn in bond yields to a new market self-regulatory framework that governs non-bank deposit rates, alongside expectations of a reduced bank funding costFollowing a proactive approach, the People's Bank of China injected liquidity into the market through an 800 billion yuan reverse repo operation, coupled with a net purchase of 200 billion yuan in government bonds.

Li Weikang, a fund manager at the Hang Seng Qianhai Bond Fund, underscored the influential role of a recent decrease in the interbank deposit rate prediction in driving the bond market’s performance

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Regulatory adjustments introduced on November 29th governing deposit rates are intended to bring down the costs associated with interbank deposits, functioning to support the bond market effectively.

Furthermore, Wan Jia Fund highlighted that these self-regulatory initiatives aim to alleviate pressure on the banks' interest margins and subsequently ease their financing costsThe reaction from the short-term deposit rates and overall bond market has been positive, with notable reductions evident in deposit yields.

With high rates of interbank deposits gradually eroding, it is anticipated that various institutions—including mutual funds, futures firms, and bank wealth management divisions—will pivot towards reconfiguring their portfolios to emphasize bond assetsThe demand for instruments like repurchase agreements, interbank deposits, and short-term funds is likely to increase, improving the attractiveness of bonds as interest rates decline.

Given historical trends and the ongoing asset scarcity in the market, Wan Jia Fund speculates that the layout for the year-end rally contributes significantly to the recent declines in interest rates

Observations from the last five years consistently show that bond yields decrease during December, fostering a positive investment sentiment.

On the other hand, Jin Xin Fund has noted that underlying motivations for the interest rate decline stem from mild anticipation of limited economic stimulus and strong expectations for future rate cutsMarket participants believe that breaching the 2% mark for the 10-year government bond yield is not just plausible but an intricate timeline event shaped by both immediate stimulus and year-end positioning demands.

Such outstanding performance of the bond market has prompted concerns regarding potential short-term pullbacksVarious institutions have provided differing perspectives to explain the possibility of market fluctuations.

As of December 3rd, benchmarks such as the 10-year government bond ETF and others related to short and medium-term financing have continued their upswing, marking unprecedented highs in closing prices

The comprehensive bond index is noted to have risen by over 3.64% year-to-date, setting new historical records.

In the wake of swift downward movements in yields across bond markets, Jin Xin Fund avers that scenarios such as profit-taking or intervention from the central bank are plausibleFurthermore, alterations in the economic foundation could introduce temporary discrepancies in market predictionsInvestors are advised to contemplate strategically locking in current profits during periods of rapid yield decrease to mitigate risks associated with volatility, while gradually accruing gains amidst the fluctuating landscape.

Having surpassed the critical 2% threshold for 10-year government bond yields, Feng Yi Fund anticipates potential turbulence in the market moving forwardThe likelihood of increased volatility is considerable, providing ample opportunities for strategic trading, particularly in early to mid-month financial cycles.

Looking short-term, the focus from Southern Fund indicates that primary market worries concern shrinking bank liabilities that could prompt reductions in asset allocations towards interbank instruments

Nonetheless, they believe that the ongoing monetary easing environment mitigates the risk of significant downturns, painting a potentially favorable picture for revised investment strategies, provided any short-term setbacks arise.

From a foundational perspective, Feng Yi Fund suggests that cash assets may increasingly yield less competitive returns compared to fixed-income optionsThus, credit bonds are likely to outperform in the coming phases, warranting consideration for extending duration preferences amidst an evolving financial scenario.

Observing the rapid growth in the market recently, Huacan Fund warns that the present bond market has largely absorbed good news, highlighting economic indicators that could play pivotal roles in causing volatilitySuch factors involve the current USD to offshore RMB exchange rate, which stands at 7.3, indicating potential depreciation risk that could impede China’s monetary policy direction; upcoming conferences, including the Central Economic Work Conference, could alter expectations surrounding policy expectations; and a recent notice from the trading association regarding regulatory assessments of several rural commercial banks could signal shifts in regulatory postures.

Looking ahead to 2025, institutions widely project that significant market corrections in the bond sector remain unlikely, with yield adjustments expected to align closely with policy interest rate formations

Overall, Huacan Fund emphasizes that fundamental and liquidity factors will remain critical anchors for the bond market's fluctuationsAs the government is poised to amplify growth-stabilizing measures to mitigate tail risks in the economy, an overall gradual recovery seems probable.

Expectedly, the People's Bank of China is likely to maintain a supportive stance, with liquidity remaining expansive, paving the way for further reserve ratios and interest rate reductions possible in 2025. In light of a moderately growing economy alongside a liquid financial framework, substantial drawdowns in bond markets appear improbable, with expectations for yield adjustments following closely alongside policy rate movements.

As the year comes to a close, patterns suggesting a preemptive rally in the bond market are palpable, coupled with visible intents from the central bank to nurture liquidity