How long can the bond market's surge continue?
===== CMS believes that the shift in monetary policy to a "moderately loose" tone indicates that a reduction in the reserve requirement ratio and interest rates can be expected next year, opening up space for a decline in short-term interest rates. SCS stated that there is a time lag at the turning point between stocks and bonds, and before transitioning to a "bull market for stocks and a bear market for bonds," there will be a period of "bull markets for both stocks and bonds," which is expected to arrive next year, with the 10-year government bond yield potentially falling to 1.5%. =====
The meeting of the Political Bureau of the Central Committee of the Communist Party of China held on December 9 continued the positive policy tone from the September meeting, releasing multiple unexpected signals.
Among them, the meeting's reiteration of "moderately loose" monetary policy is the first mention in fourteen years, leading to a sudden increase in expectations for monetary easing and interest rate cuts, pushing medium- and long-term bond yields to collectively plunge downward.
On Tuesday, December 10, the yield of the 10-year government bond active bond "24 附息国债 11" (240011) fell by 7.5 basis points, hitting a record low of 1.8225% during the day, a cumulative decline of 10 basis points over two trading days, and a decline of 15 basis points within a week.
The yield of the 30-year government bond active bond "24 特别国债 06" (2400006) also declined, dropping 7 basis points to 2.0450% at one point.
In the futures market, government bond futures rose strongly throughout the day, with the 30-year main contract closing up 1.37%, reaching a historical high. The 10-year, 5-year, and 2-year government bond futures all saw varying degrees of increase.
The government bond ETF market was all in the green, with the 30-year government bond ETF rising by 1.87% and the 10-year government bond ETF up 0.58%.
With loose liquidity support, can the bond market continue to rise?
Since last week, the bond market has rapidly played out a preemptive rally, with long-end rates breaking below the key 2% level, and subsequently entering a game between those who missed out and those taking profits.
The outcome of yesterday's Political Bureau meeting reignited enthusiasm for bullish positions in the bond market, solidifying confidence in the "bond bull."
The CMSC Zhang Wei team analysis stated, The Politburo meeting has released signals that growth policies will continue to be intensified. The shift in monetary policy to "moderately loose" indicates that cuts in the reserve requirement ratio and interest rates are expected next year, opening up space for short-term interest rates to decline, which in turn led to a significant drop in the yields of 10-year and 30-year government bonds at the end of today's trading.
From historical experience, since 2020 (excluding 2022), in the 5-10 trading days before the December Central Committee Politburo meeting, the bond market often shows a tendency to fluctuate, while after the meeting, the bond market tends to strengthen.
In terms of funding, CMS stated that although the funding situation will seasonally tighten in mid to late December, the impact on long-term bonds is controllable, and the decline in short-term interest rates may be hindered, with the interest rate curve expected to flatten.
The Zhang Xia team at CMS believes that under the expectation of continued loose monetary policy in the future, the central level of medium to long-term interest rates in the market may further decline, and the cost-effectiveness of equity assets relative to bond assets will further improve. If the profit effect in the equity market continues to improve, residents' deposits may shift to the equity market, theoretically providing significant upward space for A-shares.
From market performance, between 2013 and 2023, the probability of market increases varied from early December to the Politburo meeting, to the Central Economic Work Conference, and 5, 10, 20 days, and one month after the Central Economic Work Conference. However, in terms of indices, major large-cap indices, such as the CSI 300 and SSE 50, had an increase probability exceeding 50%, around 67%; the ChiNext index had an increase probability of about 50%, while the CSI 1000 had an increase probability of about 33%.
This has raised another layer of concern: will the rise in the stock market due to growth policy stimulation lead to a "stock-bond seesaw" effect?
Soochow Securities believes that taking the "stock-bond seesaw" of 2020 as an example, in March 2020, the Shanghai Composite Index rebounded from the bottom, while the yield on 10-year government bonds continued to decline during this period, only starting to rise from the low point in April.
This asynchronous switching phenomenon can be understood through the monetary credit cycle. The turning point of "bull stock and bear bond" usually occurs in the stages of "loose monetary + loose credit" or "tight monetary + loose credit," and it is necessary to wait for the verification of "loose credit." Bonds are more faithful to fundamentals compared to stocks and require continuous verification of "loose credit" before entering a state of established turning points.
Soochow Securities further stated that due to the time lag between stocks and bonds at the turning point, when transitioning to "bull stock and bear bond," there will be a period of "bull stock and bull bond." Under the current tone of loose monetary policy, next year may usher in a "bull stock and bull bond" phase, based on our judgment of significant interest rate cuts, we expect the yield on 10-year government bonds to decline to 1.5%. **