In recent times, the dynamics of the bond market have captured the attention of financial analysts and investors alike, particularly in the aftermath of the 10-year government bond yield dipping below 2%. This pivotal threshold has sparked discussions among bond traders regarding the new reality of lower yield environments, with the latest rates scaling down to 1.74%. The phrase "career under 200 BP" has gained traction amongst traders, signifying a shift in market sentiment.

A bond market professional articulated his mixed feelings about the dramatic market movements, stating, "It’s understandable that the rise has been too rapid, but it is still shocking." The activity in the bond market since December has been likened to "flowing clouds," reflecting the fluidity and rapid changes occurring within the financial landscape.

Since November, the bond market has seen yields retreating once more, influenced by favorable conditions such as institutional investors pre-positioning for expected rate cuts, strategic allocation towards next year's interest-bearing assets, and manageable supply pressures

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As policy signals indicate further easing, market optimism has surged, resulting in the 10-year bond yields reaching new lows.

Financial experts suggest that given the current low inflation rates in the country, there remains a demand for real interest rate reductionsWith the central bank's recent reductions in reserve requirements and interest rates, as well as continuous declines in bank deposit and Loan Prime Rates (LPR), broad domestic interest rates are expected to shift even lowerThere's speculation that the 10-year government bond could trend downwards even furtherHowever, some analysts warn that the newly established low yields may prompt profit-taking behaviors among investors, thereby creating resistance against further declines in yields.

Since October, the trend for the 10-year government bond yields primarily indicates a steady decline; this trend accelerated noticeably post-November 18th

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In the recent trading days, yields have swiftly broken through critical markers of 1.9% and 1.8%, with the 1.7% level currently at risk.

According to Lin Lian, an investment advisor at Guojin Asset Management, two main triggers have fueled this rapid descent in bond yields: First, the inclusion of non-bank interbank current deposit rates into self-discipline management, necessitating that these rates align with the publicly available seven-day reverse repurchase operation ratesThis policy has effectively streamlined the propagation of policy ratesFollowing the announcement, non-bank interbank deposit rates declined by 20–30 basis points, allowing interbank certificates of deposit to drop swiftly down to 1.7%, subsequently providing room for short-end bond yields to fall as well.

Second, the emphasis on "moderately accommodative monetary policy" in the meeting on December 9 has set a precedent

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Since 2010, the central economic work conference has typically characterized monetary policy as "prudent." This recent shift towards "moderately accommodative" could indicate that the easing measures may intensify in the coming year, potentially allowing even more room for lower policy rates and, consequently, influencing bond yields positively.

Niu Yi, a senior analyst at Huajin Securities, has echoed these sentiments, stating that the cuts to OMO and LPR rates, combined with swift adjustments in mortgage interest rates, have placed banks under pressureAs deposit rates have been trending downward, there’s been a surge in demand for bonds, especially among non-bank financial institutions that have increasingly sought high-liquidity, short-duration assetsThis uptick in demand has thus bolstered the bond market in early December.

However, he cautions that while the sharp downward trend in yields post-December 9 has been notable, the extent of future declines should be met with some skepticism

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There is a notable self-learning effect among institutional investors this year, reflected by an acceleration in trading activities and more pronounced anticipatory moves resulting in competitive "running ahead" behaviors.

“Watching the market every day brings both excitement and anxiety,” commented a bond market participant, noting that while the yields of 10-year government bonds dropping below 2% or even 1.9% was not inherently unexpected, the rapid pace has exceeded forecasts, highlighting a clear trend of institutions racing to capitalize on the shifting landscape.

Institutional research suggests that the stellar performance of this market rally is primarily driven by anticipatory movements regarding upcoming interest rate cuts

In this context, funds have been recognized as some of the fastest movers within the current market dynamics.

It has been reported that since November, there has been a notable increase in fund inflows to buy long-term low-yielding government bonds while simultaneously reducing holdings of certificates of deposit, illustrating a strategic allocation approach towards benefiting from the anticipated market movements.

Research by Zheshang Securities indicates that since November 21st, there has been considerable allocation towards bonds in the secondary market by funds and other non-bank financial products, such as insurance and wealth management, significantly increasing market volume with an additional 465.5 billion yuan added in recent weeks alone.

Furthermore, the substantial influence of funds on the market can be attributed to their positive performance in the bond market over the past two years, leading to a significant influx of capital into bond funds, which continues to grow

"Some investors are utilizing funds to buy into bonds, noticeably increasing their positions during favorable market conditions,” a market insider mentioned.

As expectations regarding the future of the bond market unfold, differing opinions among institutional analysts are emergingLin Lian maintains that with current low inflation levels remaining prevalent, the demand for further reductions in real interest rates persistsHe anticipates that as the central bank continues to ease monetary policy through cuts to reserve requirements and rates, the central tendency of domestic interest rates may shift further downwards, potentially paving the way for additional reductions in 10-year government bond yields.

Feng Lin, Executive Director of the Research Department at Dongfang Jincheng, also shares a long-term view, stating that under the current moderately accommodative monetary policy, significant cuts may be on the horizon, allowing for the possibility of further decreases in interest rates

Projections suggest the 10-year treasury yields might see a lower trading band in the range of 1.5% to 1.6% in the near future.

Conversely, some analysts advise a more cautious approachDongwu Securities highlights the current drop in the 10-year yield to 1.77%, while the 30-year yield has momentarily dipped below 2%. This extreme market behavior reflects investor expectations influenced by the economic work conference regarding potential future developments in monetary policy, thus risking overvaluation of anticipated rate cuts.

“In the short term, we believe the 10-year government bond may oscillate between 1.8% to 2.0%, with limited further downside movement,” Niu Yi proposes