Financial Services Association, December 17 (Reporter Liang Kezhi) At the beginning of December, the market unanimously anticipated that some institutions were scrambling. Cash yields represented by 10-year treasury bonds broke through, breaking the three major integer marks of 2%, 1.9%, and 1.8%. By the 16th, they had already reached the 1.7% integer mark.

Trading data shows that on December 17, the yield on active 10-year treasury bonds hovered between 1.7050-1.7175%. While breaking 1.7% was one step away, there was a sudden hesitation and division in the market.

A number of institutional bond traders told the Financial Federation that, on the one hand, early transactions have fully met policy expectations such as interest rate cuts, etc., and second, most markets expect 1.7% to be the critical point of the latest regulatory intervention.

A Financial Services Association reporter noticed that the situation where market expectations were unanimously bullish have weakened. Some institutions began issuing “early warnings” for the bond market on the 17th to be wary of the risk of high level adjustments.

On December 17, Dongwu Securities said that the current bond market has run too much, and it is recommended to be careful to pursue higher prices; Guohai Securities believes that 10Y treasury bonds are not cost-effective, and there is limited room for yields to continue to decline.

Liu Yu, chief fixed income analyst at Huaxi Securities, keenly noticed that the central bank operation on the 16th formed a funding gap of 744 billion yuan, raised capital prices, or sent a signal of rational trading to the bond market. Liu Yu believes that in the face of the bond market coming out of the “exit” market one after another, there are currently only capital costs that can limit the downward slope of interest rates.

The three major hurdles have been broken in a row for 7 days, and policy expectations have been fully traded

According to Wande data, starting Monday, December 6, the bond market, driven by factors such as policy expectations, was represented by 10-year treasury bond yields, falling all the way from 2% to 1.7050% within seven working days.

Zhang Xu, head of fixed income at Everbright Securities, believes that the recent decline in bond yields has been too fast. In addition to optimizing the self-regulatory management of interest rates on non-bank interbank deposits, some institutions expect early entry into the market to reap profits, further reducing yields.

At a time when the yield on 10-year treasury bonds is approaching 1.7%, some institutions quickly spoke out on the 17th, prompting them to pursue higher risks.

In the weekly report released by the bond market on the 16th, Dongfang Jincheng called for continuing to rise after a rapid decline in yield, it is not cost-effective, and that we need to be wary of the possibility of regulatory intervention.

Li Yong, an analyst at Dongwu Securities, believes that the current yield on active 10Y and 30Y treasury bonds has declined and broken through the 2% point, which is the ultimate interpretation of the expectations of interest rate cuts brought about by a “moderately loose monetary policy.” Also, there are already too many rushing runs, so it is recommended to be careful to chase higher.

Xiao Jinchuan, chief macro analyst at Huaxi Securities, believes that the current problems facing the bond market may be that interest rate cuts are already fairly well priced after the “rush.”

Furthermore, from the perspective of interest spreads, Xiao Jinchuan analyzed that the monthly average value of DR007 from October to December was 1.66-1.69%. The interest rate difference with the current 10-year treasury bonds is only about 5 bps. The interest spread is too thin, which is a difficult situation in the current bond market.

Jin Yi, head of fixed income at Guohai Securities, approved the price comparison of 10Y treasury bonds with policy interest rates, treasury bonds, credit bonds, and mortgages. He also believes that the current cost performance ratio of 10Y treasury bonds is not high, and there is limited room for yield to continue to decline.

At the same time, Jin Yi also noticed that the recent inversion of the gap between China and the US has increased, reaching a historical extreme. The current spread between China and the US has set the expectation of a 23 BP cut in interest rates on Chinese bonds, judging that the downward momentum of interest rates on Chinese bonds is insufficient in the short term.

On December 16, a bond trader at an asset management agency in Shanghai told the Financial Federation that recent market rumors indicate that the central bank is investigating the bond holdings of statistical institutions. Whether true or false, it indicates that regulation is at a critical point for declining interest rates. The previous tipping point was 1.8%; most people think the next one will be 1.7%.

When is the next small peak in the bond market?

It is currently impossible to confirm whether 1.7% is the agreed bottom line of the regulatory authorities, but as the 10-year treasury yield approaches 1.7%, the voices and signals of market rationality are indeed increasing.

For example, Liu Yu of Huaxi Securities believes that the central bank operation on the 16th formed a funding gap of 744 billion yuan, raised capital prices, or sent a signal of rational trading to the bond market.

Zhang Xu of Everbright Securities also said earlier that the valuation of the bond market is not cheap at this stage. The three-day average of DR007 is 1.78%, and market liquidity is relatively loose.

Zhang Xu also reminded the market that monetary and fiscal policies are not all favorable to the bond market. For example, the strength of fiscal policy is negative for the bond market, disrupts the supply and demand relationship in the bond market and affects investors' expectations of economic fundamentals; some structural policies, such as refinancing, have limited impact on the bond market, and may even drive up bond yields.

Furthermore, judging from economic data at the end of the year, the degree of recovery in economic fundamentals was better than expected, which also caused some institutions to change their judgment on a strong increase in stimulus policies in the short term.

Li Yong of Dongwu Securities believes in the report that economic fundamentals are recovering slowly. He cited data, including the value added of industries above the November scale of 5.4%, up 0.1 percentage points from October; the cumulative fixed asset investment in January-November reached 3.3% year on year, and manufacturing investment was 9.3%; the November national urban survey unemployment rate was 5.0%, the same as last month and the same month of the previous year, respectively. The employment situation was generally stable, supporting the continued growth of market demand.

Zhang Xu also said that the manufacturing PMI rose for three consecutive months in November, and was in the expansion range for the next two months. The expected index of production and operation activity continued to rise, indicating increased market confidence and improved economic fundamentals.

Regarding the next bond market trading opportunity, Jin Yi, head of fixed income at Guohai Securities, believes that current market pricing and interest rate cuts are quite sufficient. There is limited room for 10-year treasury bonds to decline in the short term, and there may be a need to see a new round of interest rate cuts begin.

Xiao Jinchuan of Huaxi Securities also believes that to push interest rates down even more clearly, the market may expect a new round of monetary easing after interest rate cuts are implemented.

On December 16, a bond trader at a commercial bank in a city in North China told the Financial Federation that it is not uncommon for next year's bond market expectations to be consistent. There should also be a market similar to this rapid decline and difficult to intervene. The central bank may create policy tools to keep the yield curve within a certain range.