As 2025 dawns, the bond market continues to bask in the bullish sentiment that began at the end of the previous yearOn January 3rd, traders in the interbank market witnessed a remarkable drop in the yields of medium to long-term government bonds, with the yield on 10-year bonds briefly dipping below the crucial 1.6% mark, while 30-year bonds fell to around 1.8%. This surge was also reflected in the futures market, where prices for both 10-year and 30-year government bonds reached new heightsDespite a slight correction in the afternoon that increased overall volatility for the day, the bond market sentiment remains strong.

Market analysts have pointed to the anticipated monetary policy easing set to be implemented towards the end of 2024, which has reignited bullish sentiments among bond investorsFurthermore, the reduction in interbank deposit rates, coupled with proactive action from institutional investors such as mutual funds who seek to capitalize on these conditions, has contributed to the relentless decline of bond yields.

The infusion of monetary support is undoubtedly propelling the gratitude towards a rising bond market.

The People's Bank of China has embraced a policy of monetary easing, providing institutional investors with abundant liquidity

According to reports, the central bank commenced open market operations for government bonds in August 2024, resulting in net purchases of bonds worth 100 billion, 200 billion, 200 billion, 200 billion, and 300 billion yuan over the subsequent monthsAdditionally, to ensure that sufficient liquidity remained within the banking system, the Bank executed reverse repos amounting to 5 trillion, 8 trillion, and 14 trillion yuan between October and December 2024, a progressive increase that underscores its commitment to supporting the market.

Wang Fang, president of Everbright Securities, noted that since 2024, due to ample market liquidity and the scarcity of high-yield bonds, there has been a phenomenon of ‘asset scarcity’. Under the backdrop of local government debt reduction, urban investment bonds have become hot commodities in the market once againThe overall yield of credit-worthy varieties tends to track the movements of the benchmark market rates but demonstrates greater volatility during market corrections

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Overall, under the influence of weaker expectations, accommodative monetary policy, and structural adjustments in supply and demand, the bond yields have fallen to historically low levels, though the risk remains manageable.

According to Tan Yiming, chief analyst of fixed income at Minsheng Securities, the current recovery in fundamentals is relatively limited while expectations for monetary easing are still present, providing support for the bond marketMajor banks may experience increased funding inflows with cross-year new year bonuses and premiums contributing to certain allocation demandsHowever, markets must remain vigilant for potential profit-taking pressures, local government debt supply, the degree of credit expansion restoration, and changes at the margin in the macroeconomic fundamentalsThe characteristic of bond market volatility is likely to intensifyLooking ahead, the developments during the local and national conferences will play a crucial role, with fiscal policy efforts and their effectiveness becoming key factors for future trends.

Wang Guanjun, an analyst at Shanxi Securities, emphasized that there are no foundational drivers present for a reversal in the bond market

The current economic climate remains one of slow recovery, and the recovery trajectory still requires watchingFrom a policy perspective, since September 24, 2024, the central bank has steadily rolled out measures to facilitate monetary easing and lower existing mortgage rates, which together nurture a more accommodating monetary policy environmentAs further interest rate reductions are implemented, this is expected to continue pushing bond market yields downwardRecent meetings of the Central Political Bureau have set a tone of easing for future monetary policyGiven that 2025 marks the final year of the 14th Five-Year Plan, it is reasonable to anticipate more proactive fiscal policies to align with corresponding monetary strategiesAmid a current market characterized by conservative expectations, there is still potential for long-term bond yields to decline further.

Special government bonds and local government special bonds are poised to significantly influence the trajectory of the bond market this year.

On December 25, 2024, guiding opinions were issued focused on expanding the areas of application for local government special bonds, enhancing project capital investment, improving budget balancing for special bond projects, optimizing the review and management mechanisms for these projects, accelerating issuance and utilization of special bonds, enforcing comprehensive management, supervisory accountability, and strengthening safeguards throughout the process.

Public records indicated that as of January 2, 2025, provinces and municipalities had collectively reported local bond issuance plans totaling 654 billion yuan for the first quarter of 2025. The proportions of general bonds, refinancing general bonds, new special bonds, and refinancing special bonds were 7%, 17%, 34%, and 42%, respectively.

On January 3, 2025, there were stated intentions to further emphasize investment efficiency precisely, capitalizing on the vital role of investments

Plans were outlined to increase the issuance scale of ultra-long-term special government bonds, expand the support scope for major national strategic implementations and essential security capacity constructions, and ultimately to enhance the proportion of government bond funds directed to various projects.

According to Wang Fang, the government’s work report for 2024 specified the continuation of the issuance of ultra-long-term special government bonds for several consecutive years, thereby normalizing their issuanceSimultaneously, plans for newly allocated special bonds initiated at the beginning of 2024, along with the increase in refinancing special bonds proposed in November 2024, resulted in special debt quota allocations reaching close to 6 trillion yuan for 2024, marking the largest scale historicallySpecial government bonds and local government special bonds have become essential tools in the implementation of even more accommodative fiscal policies—an initiative expected to profoundly influence bond market trends.