In a significant turning point for the financial landscape, the yield on 10-year government bonds plummeted to lows not seen in the past 22 yearsAs of today, futures contracts for 30-year treasury bonds expanded their gains to 0.5%, while yields for the 10-year and 5-year contracts edged upward by 0.19% and 0.12%, respectivelyMore notably, the yield of the actively traded 10-year bond (active bond 240011) sunk down to a historic low of 1.97%. Furthermore, December 2nd witnessed a dramatic upturn in the bond market, with the yield on 10-year treasury bonds falling below 2%, marking a significant milestone as it entered what many are referring to as the "1 Era" - the lowest point since April 2002.

Throughout this year, the yield on 10-year government bonds has displayed a consistent downward trend, a fact that underscores the current financial climate

By the market close on December 3rd, various bond-related ETFs, including the 10-year treasury ETF, short-term financing ETF, and corporate bond ETF, continued their upward trajectory, reaching record highs since their inceptionThe latest data, as of December 2nd, revealed that the total index for bond funds tracked by Wind had achieved a cumulative increase of 3.64% for the year, hitting all-time highs.

The strong performance of the bond market has sparked concerns among investors regarding potential short-term correctionsA comprehensive analysis from various institutions has highlighted different perspectives on the market's volatility.

The unexpected record-low yield on the 10-year government bond is attributed to several crucial factorsAccording to analyses from Huahan Fund, a key driver has been the self-regulating pricing mechanism for market interest rates which has directly managed rates related to non-bank deposit instruments

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The expected reduction in borrowing costs for banks has led to a substantial drop in yields for short-term instruments like certificates of deposit, subsequently fueling bullish sentiment in the bond marketMoreover, the central bank's recent move to conduct 800 billion in reverse repos and a net purchase of 200 billion in government bonds has bolstered liquidity within the market, providing a supportive environment for bond trading.

Li Weikang, a fund manager at Hang Seng Qianhai Bond Fund, emphasized that the expectation of lowered rates on interbank deposits played a central role in the strengthening of the bond marketRecent regulations capping the interest rates on interbank demand deposits to fall in line with the central bank’s 7-day OMO rate, currently at 1.5%, have shifted the dynamicsAs higher interbank rates lose stability, this is expected to lead to a reassessment from fund managers and financial institutions regarding their investments in bond assets, resulting in increased demand for repos and short-term financial instruments.

Wanjia Fund remarked that these self-regulatory initiatives are likely to further drive down the rates of interbank demand and corporate deposits, helping alleviate the pressure on banks' interest margins

Consequently, both deposit and bond market rates have positively responded, with a significant decline observed in deposit rates.

With the stability of interbank deposit rates now in question, the pressures on financial entities like money market funds and banks may prompt a reallocation of assets towards more favorable bond investmentsThis shift should manifest in heightened demand for short-term securities and lead to a noticeable decline in both repo rates and various money market asset yields, making bonds increasingly attractive for investment as their capital appreciation improves.

Drawing insights from historical patterns and existing asset scarcity within the market, Wanjia Fund advocates for strategic positioning ahead of the new year, as this has often driven interest rates down in December

The last five years have shown a trend of decreasing bond yields in this month as investors lean towards bullish stances.

Jinxin Fund adds that the underlying cause for this downward trend in rates is rooted in the market's subdued expectations regarding the strength of economic stimulus measures coupled with strong anticipations of future interest rate cutsInterestingly, the consensus among market watchers is that the 10-year treasury yield breaking below 2% is not just a possibility but an expected outcome within a short timeline, provoking preemptive reactions from investors.

The continued robust performance of the bond market has also raised concerns regarding a potential short-term correctionAs different institutions analyze these developments, the consensus remains divided on the anticipated market fluctuations.

In light of the favorable trend, various bond fund ETFs including those targeting short-term financing, government development, corporate debt, and city investment funds have consistently reached new closing highs

As noted on December 2nd, the total bond fund index recorded a cumulative increase of 3.64% for the year, setting new benchmarks.

Removing funds that have embedded rights, nearly 95% of pure bond funds have achieved historic highs in net value, with five of these funds reporting annual yields exceeding 10%. Moreover, over 200 pure bond products have registered annual yields greater than 5%.

The rapid decline in yields within the bond market has encouraged firms like Jinxin Fund to advise caution, suggesting that investors consider taking profits when yields drop swiftly to lock in gains and mitigate downside risk, while gradually accumulating returns in a fluctuating market environment.

Following the momentous dip of 10-year treasury yields below the 2% benchmark, Yizhan Fund anticipates a potentially volatile future, notably as rates settle into these lower ranges, suggesting heightened chances for swings in yield that provide attractive trading opportunities

Temporal considerations hint that the early to mid-month period may represent favorable entry points.

In the short term, Nanfang Fund highlights a prevailing concern regarding the contraction at the banks’ liability side, which could lead to a reduction in allocations towards interbank assets (such as liquidity and short-term debt funds). However, given the ongoing monetary easing environment, the risks associated with corrections remain manageable, and if any adjustments occur, they could represent excellent buying opportunities.

From a portfolio allocation perspective, Yizhan Fund suggests that the attractiveness of cash-like assets is increasingly overshadowed by the value of fixed-income assetsThis environment positions credit bonds to deliver substantial performance, making a case for extending durations appropriately.

In summary, although the bond market has experienced rapid growth in the near term, Huahan Fund cautions that it has already factored in many positive sentiments, necessitating closer attention to potential volatility triggers

Current concerns include the dollar-rmb exchange rate settling at 7.3, reflecting some depreciation pressures, alongside anticipated policy shifts from the politburo and central economic work meetings that could influence market sentiment.

Peering into 2025, institutions generally anticipate limited risks of substantial corrections within the bond market, predicting a decline in bond yield centrality following policy interest ratesOverall, Huahan Fund remains optimistic about the bond market's foundations, influenced by supportive monetary actions and the government's commitment to stabilizing growth, which will likely facilitate a mild economic recovery.

The winds of change are evident as the central bank is likely to maintain a supportive stance, sustaining a loose liquidity environmentThere lies the potential for further interest rate cuts and reserve requirement reductions in 2025. Given the moderated economic conditions and findings of liquidity support, the bond market seems poised to avoid drastic corrections, anchoring expectations for shifted yield norms tailored to align with policy changes.

With the year drawing to a close, bonds may see heightened trading activity as investors position themselves strategically, buoyed by the central bank's clear intentions to nurture liquidity, lower banking costs, and boost allocation demands