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The happy experience of bond investors is still continuing. After a brief adjustment in early July, the bond market has strengthened significantly recently, boosted by the central bank's unexpected interest rate cut and deposit rate cut, and the 10-year treasury bond yield has broken through the previous key point of 2.2%.

Market participants said in an interview with Securities China that the financial system needs to continue to maintain a low interest rate, and there is still room for deposit rates and policy rates to be lowered under the high interest rate spread pressure on the bank side. Therefore, there is still room for the 10-year Treasury bond to fall, and the bond market is still bullish in the long term, and there is a high probability that it will challenge historical extremes such as 2% in the future.

Debt bull can't be stopped

"The bond bull market has already started and cannot be stopped in the short term." A bond trader from an institution in Shanghai expressed his feelings to a reporter from Securities China when talking about the current bond market.

On July 22, the central bank announced that the 7-day reverse repurchase operation rate would be adjusted from the previous 1.80% to 1.70%, which was the first policy interest rate cut since August 2023. Subsequently, the 1-year and 5-year loan market benchmark rates (LPR) were both lowered by 10BP to 3.35% and 3.85%.

Subsequently, the bond market bulls launched a continuous offensive. On July 25, the 10-year Treasury bond yield broke through the previous key point of 2.2%. Subsequently, the 10-year Treasury bond yield continued to decline, and as of August 2, it had fallen to 2.12%.

"The central bank's interest rate cut shows that monetary policy is further relaxed. The reduction in the 7-day reverse repurchase rate is beneficial to the downward trend of short-term interest rates in the bond market, and to a certain extent it also opens up downward space for the long end. At the same time, the further reduction in deposit rates has led to a decline in the attractiveness of deposits, which may aggravate the 'moving' of deposits to wealth management and funds, and boost institutional bond allocation demand." Feng Lin, director of research and development department of Orient Securities, told Securities China reporters.

The aforementioned bond trader admitted: "The speed at which interest rates fell exceeded expectations, and some institutions did not keep up with this round of market conditions, but overall expectations were relatively consistent, and an increase in long positions was still a high probability event.

Funds continue to pour into the bond market. In the first two quarters of this year, the net value of bond funds increased by more than one trillion yuan. In terms of newly issued funds, the scale of newly issued pure bond funds grew rapidly in the second quarter. According to statistics from Debon Securities, the number of newly issued pure bond funds in the second quarter reached 285.6 billion, an increase of 144.7 billion from the first quarter.

Policy support such as interest rate cuts and reserve requirement ratio cuts may also continue to appear. Li Xifeng, senior researcher at the R&D department of China Securities Credit R&D, said that the July Political Bureau meeting required that "macroeconomic policies should continue to be more effective and more powerful" and "counter-cyclical adjustments should be strengthened" to promote a steady decline in the overall financing cost of society; on the other hand, the current actual interest rate is high, which limits the financing demand of the real economy. In addition, the United States is likely to start cutting interest rates in the second half of the year, which will reduce the obstacles to lowering my country's policy interest rate and increase the probability of future interest rate cuts.

Feng Lin also said that after the central bank cut interest rates in July and guided the LPR quotation downward, there is room for a reserve requirement ratio cut in the third quarter to support the large-scale issuance of government bonds. At the same time, considering the economic and price trends in the future, the possibility of another cut in the policy interest rate in the fourth quarter cannot be ruled out.

"In the medium and long term, the 10-year treasury bond still has room to fall. At present, the real estate market continues to be sluggish, the financing demand of the real economy is weak, the endogenous recovery of the economy is slow, monetary policy and liquidity will continue to be relatively loose, and the bond market is still in a period of favorable conditions." Li Xifeng said.

Traders bet on historic limits

When the 10-year Treasury yield fell to 2.12%, the market also speculated that the key interest rate would break through 2.10%.

"From the current context, there is a possibility that the 10-year Treasury bond yield will reach 2.10%," the team of Liu Yu, chief economist of West China Securities, pointed out in a recent research report.

However, the report stressed that subsequent breakouts face greater resistance. Although the regulatory attitude was relatively mild during the process of the 10-year Treasury bond rate moving from 2.20% to 2.10%, if the downward slope of interest rates is too steep, there is a possibility that regulators will step in again to guide pricing.

But some traders and analysts are clearly more optimistic, and have even begun discussing whether the 10-year Treasury bond yield could fall below 2%.

"The 2.10% level is basically just around the corner. We are now more concerned about whether it will fall below the historical limit of 2%." The aforementioned trader said that some institutions are also betting on a continued decline in long-term bond yields.

The head of a private bond fund also said that there is currently no sign of institutions reducing their holdings, and his institution is relatively optimistic about the market outlook.

"Integer points have some psychological implications. We cannot rule out the possibility that supervision will further indicate risks, but we believe that it is very likely to fall below 2%," said the official.

Li Xifeng said that in the long run, the central axis of domestic economic growth will continue to move downward, the corporate and local government debt interest payment burden is heavy, the financial system needs to continue to maintain a low interest rate state, and under the high pressure of interest rate spread on the bank side, there is still room for deposit rates and policy rates to be lowered. Therefore, the 10-year treasury bond still has room to fall. In the long run, the bond market is still bullish, and there is a high probability that it will challenge key positions such as 2% in the future.

Yang Weixiao, assistant director of Guoyuan Securities Research Institute and head of aggregate research, also said in an interview with Securities China: "Bonds are still in a long bull market. The decline in the subsequent 10-year Treasury bond yield will slow down, but it may only be a matter of time before it falls below 2%."

However, Feng Lin believes that if long-term bond interest rates continue to break through previous lows, it may trigger the central bank's bond selling operations.

"This also means that the 10-year Treasury bond yield will have a bottom line in the future, and it will be difficult to break through 2.0%. Therefore, we need to be cautious about continuing to chase long-term bonds, but considering that the core logic affecting the bond market has not changed, adjustments are still opportunities to intervene," said Feng Lin.

Source: China Securities

Statement: All information content of Databao does not constitute investment advice. The stock market is risky and investment should be cautious.

Editor: Xie Yilan

Proofreading: Ran Yanqing

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