The implementation of expansive monetary policies has reverberated through financial markets, sending the yield of 10-year government bonds tumbling to unprecedented lowsOn the 10th of December, market reactions showcased this trend as the active 10-year government bond coupon "24 Interest-bearing government bonds11" saw its yield dip by 7.5 basis points to 1.8300%, marking a new historical lowMeanwhile, the yield of the active 30-year government bond "24 Special National Debt 06" also fell sharply to 2.0450%, down by 4 basis points from the previous dayThe bullish momentum did not stop there; government bond futures soared, with the leading 30-year contract closing up by an impressive 1.37% and reaching record highsThe exchange-traded funds (ETFs) linked to government bonds mirrored this positive trend, specifically, the 30-year government bond ETF surged by 1.87%.

In light of the economic strategies for 2025, a pivotal conference introduced the concept of “extraordinary counter-cyclical adjustments,” effectively shifting the prevailing monetary policy stance from a consistent “prudent” approach maintained for 14 years to one characterized by “moderate easing.” This marked a significant pivot in economic governance aimed at reviving growth after years of slowdown.

Such signals of easing have pushed bond markets into bullish territory

Analysts predict that this trend could continue, projecting that yields on 10-year government bonds may even drop to as low as 1.6%. However, there remain cautionary voices suggesting that if the economic landscape in 2024 mirrors the current patterns, there is a substantial risk of yield rebounds in response to potential economic stabilization.

A Dramatic Downturn in Bond Yields

On December 10, bond yields took a notable downturn, with the 10-year government bond yield hitting 1.83%. Similarly, the yield on the 30-year bond fell below 2.1%, both registering all-time lows

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Such movements in the bond market have contributed to a robust performance in futures trading, where various contracts saw significant gains throughout the day.

The futures landscape witnessed substantial surges, particularly in the 30-year leading contract which closed with a 1.37% increase, having at one point surpassed a 1.6% riseThe 10-year, 5-year, and 2-year contracts also concluded with impressive gains, each setting new closing prices.

Traders noted that the backdrop of potential reserve requirement cuts coupled with growing expectations of interest rate reductions may encourage trading entities to extend their durations in anticipation of further rate declines

With liquidity expected to remain ample and a looming issue of asset scarcity ongoing, the narrative around maintaining a bullish bond market outlook is gaining traction.

Market sentiment surrounding the bond market has been electrifying this year, characterized by aggressive institutional purchases of long-duration bonds which have continuously compressed yieldsThis behavioral trend prompted the central bank to intervene to mitigate potential risks in the bond marketBy the end of September, the yield on 10-year government bonds had briefly spiked above 2.2% due to a bundle of policy maneuversHowever, since November, yields have retreated below 2%, culminating in an overall decline exceeding 25 basis points by the fourth quarter; the 30-year yields followed a similar downward trajectory.

Support for the Bull Market in Stocks and Bonds

Analysts predict that under the current climate of relaxed monetary policy, 2025 may usher in a "double bull" market for both stocks and bonds

It is posited that typically, transitions from bear to bull markets require sustained credibility of “broad credit,” while equity markets favor decisive early entry positions, suggesting a tenure of growth before any potential shift to “bullish equities and bearish debts” occurs.

Others reiterate that there is room for both markets to flourish simultaneouslyThe tone of the latest meeting has been quite optimistic regarding policy spaces, and in light of the insufficient quantitative results from prior policy measures, a rapid withdrawal of expansive monetary policies seems unlikelyThey argue that the durability of the bullish bond market hinges largely on the sustainability of forthcoming expansive policy actions.

Historical context reveals that during the release of the massive 4 trillion yuan stimulus package in 2008 amid the global finance crisis, while stocks rebounded and the bond market displayed some fluctuations, the prevailing bullish trend in bonds remained unaffected until the conclusion of interest rate cuts

Following 2008, the phrase “moderately easing monetary policy” was consistently highlighted in Chinese financial discourse, shaping economic responses until well into 2010.

The recent responses from the bond market have outperformed expectations, especially when compared to the stock marketThe Shanghai Composite Index saw its gains narrow after initial surges exceeding 1.2%, eventually closing at a 0.59% increase by day’s endIn contrast, the bond ETF market maintained positive momentum throughout the day, with the 30-year government bond ETF achieving a remarkable 1.87% increase, setting an all-time single-day high since its debut.

Diverging Sentiments on Interest Rate Movements

Numerous fixed-income traders forecast that the central bank’s monetary policy could become even more accommodating in 2025, estimating that the extent of rate cuts and reserve requirement reductions could surpass those witnessed in the current year

These policy shifts could potentially propel bond yields lower, with projections suggesting at least a 20-30 basis points drop for the 10-year government bonds.

Analysts from Zheshang Securities hold similar views that reductions in the reserve ratios and interest rates could increase in frequency and magnitude in 2025. They encourage patience and a strategic approach amid current market movements, viewing this moment as an opportune window for asset allocation, expecting the long-term outlook for the bond market to remain bullish, with yields oscillating between 1.6% and 2.1% in 2025.

Conversely, some analysts caution against underestimating the limits on the downside potential for bond yields, attributing this viewpoint to ongoing impacts from both existing policies and emerging fiscal initiatives likely to revitalize the economy

Increased fiscal measures are expected to bolster bond supply, while an upturn in market sentiment alongside improving corporate profits may constrain further rate reductions.

In recent months, consumption has been emphasized more prominently in key meeting agendas, with the second half of this year witnessing a strong push for policies encouraging consumption upgrades, thus serving as a stabilizing influence on economic fundamentalsData indicates tangible improvements in consumption patterns, with the total retail sales of consumer goods in October reflecting a 4.8% increase compared to the previous year, a substantial acceleration from the pace recorded the prior month.

The Huafu Fixed Income team suggests that if economic conditions remain consistent with 2024 trends, a downshift in policy rates may be projected at around 30 basis points, while also predicting a continued pattern where shorter yields drop first followed by longer-term yields

They caution, however, that given the substantial easing measures already enacted this year, heightened fiscal policies in 2025 could see both economic conditions and sentiment strengthen significantly, potentially leading to marked increases in bond yields, possibly reaching around the 2.2% range.

Liu Yu, Chief Economist at Huaxi Securities, articulates concerns regarding what might be perceived as the "risk of overpricing" in current government bond yields, citing unresolved pressures stemming from liquidity-related issues (including tax periods and year-end constraints), policy responses, and regulatory measures directed at interest rate rationalizationLiu anticipates immediate adjustments in the bond market are highly likely following today's pronounced moves.