China bond market edges down on Monday; PBOC injects net 439.7 billion yuan

By Wang Jing, Xinhua Finance, Beijing, September 28

China's bond market edged lower on Monday (September 28), with treasury futures closing broadly lower and interbank cash bond yields showing a "long-end rise, short-end stable" pattern, with overall fluctuations around 0.5 basis points (BP). The central bank conducted a net injection of 439.7 billion yuan via open market operations, ensuring ample liquidity for the quarter-end period, while short-end funding rates turned lower.

Institutions believe the market is relatively insensitive to fundamentals in the short term, with limited overseas disruptions. From the perspective of fiscal-monetary coordination, as the peak supply of government bonds approaches, liquidity is expected to remain stable and ample. However, slightly crowded trading positions may lead to periodic consolidation.

Market Movements

Treasury Futures closed lower across the board:

• 30-year contract: -0.20% at 117.06
• 10-year contract: -0.05% at 109.535
• 5-year contract: -0.04% at 106.525
• 2-year contract: -0.02% at 102.574

Interbank Key Rate Bonds showed slight divergence, with long-end bonds weakening and short-end bonds stable:

• 30-year government bond ("26 Ultra-Long Special Government Bond 04"): yield up 0.85 BP to 2.1155%
• 10-year policy bank bond ("26 CDB 05"): yield up 0.1 BP to 1.754%
• 10-year government bond ("26 T-bond 10"): yield up 0.15 BP to 1.6715%

Convertible Bonds: The CSI Convertible Bond Index closed down 0.45% at 469.73 points, with a turnover of 36.103 billion yuan. The Wind Convertible Bond Equal-Weight Index fell 0.53% to 239.64 points.

Top losers: Taitan Convertible Bond (-8.92%), Aohong Convertible Bond (-6.90%), Yitian Convertible Bond (-6.65%), Tianyuan Convertible Bond (-6.42%), Outong Convertible Bond (-6.09%).

Top gainers: Fengmao Convertible Bond (+10.38%), Yanpai Convertible Bond (+4.53%), Haishun Convertible Bond (+2.36%), Yongdong Convertible Bond 2 (+1.99%), Xiaoxiong Convertible Bond (+1.67%).

Overseas Bond Markets

North America (as of September 25 local time): U.S. Treasury yields mostly fell.

• 2-year: -6.23 BPs to 4.852%
• 3-year: -7.38 BPs to 4.924%
• 5-year: -6.97 BPs to 4.984%
• 10-year: -3.94 BPs to 5.156%
• 30-year: +0.44 BP to 5.486%

Asia: Japanese government bond yields generally rose.

• 5-year: +1.5 BP to 2.422%
• 10-year: +0.2 BP to 3.09%

Eurozone (as of September 25 local time):

• France 10-year: -0.1 BP to 4.688%
• Germany 10-year: +0.2 BP to 3.599%
• Italy 10-year: -3.4 BPs to 4.509%
• Spain 10-year: -0.4 BP to 4.076%

Other Markets: UK 10-year gilt yield fell 1.6 BPs to 5.365%.

Primary Market

The Export-Import Bank of China issued a 30-day financial bond ("26 EXIM Discount Bill 12") with a winning bid rate of 1.2362%, a bid-to-cover ratio of 1.0, and a marginal ratio of 1.0.

Liquidity

Open Market Operations: The People's Bank of China (PBOC) announced on September 28:

• Conducted 139 billion yuan in 7-day reverse repos via fixed-rate, quantity-based bidding, fully meeting primary dealer demand. Operation rate: 1.40%, bid volume: 139 billion yuan, winning volume: 139 billion yuan.
• Conducted 661 billion yuan in overnight reverse repos.
• Conducted 300 billion yuan in 14-day reverse repos via fixed-quantity, rate-based bidding with multiple-price allocation.

With 660.3 billion yuan in reverse repos maturing on the same day, the net injection was 439.7 billion yuan.

Funding Rates: Shibor short-term rates mostly declined.

• Overnight: -0.3 BP to 1.361%
• 7-day: -1.07 BPs to 1.3893%
• 14-day: -1.9 BPs to 1.399%
• 1-month: +0.06 BP to 1.4266%

Institutional Views

Huatai Fixed Income: The current driver of RMB pricing is not the China-U.S. interest rate differential but the flow of settlement funds. With strong export momentum persisting and limited capital outflow channels, the RMB is expected to strengthen steadily in the medium to long term, which is broadly positive for bond market liquidity. In terms of products, trading room for rates bonds within 10 years is limited. Ultra-long bonds, recommended over the past quarter, still offer value, though short-term profit-taking risks should be monitored. Credit bonds have a relatively better supply-demand balance than rates bonds, but spread compression space is minimal. Attention should be paid to the relative value of Tier-2 and perpetual bonds after general credit spreads decline.

Guosheng Fixed Income: Ultra-long bonds have not yet exhausted their rally potential, and yields are still expected to trend lower amid volatility. As government bond supply slows, expectations of ultra-long bond supply have declined, with the market pricing this in early, reflected in the preemptive compression of ultra-long bond spreads. Currently, this compression has not been overdone. The low positions of small and medium-sized banks may provide a buffer for the bond market in Q4 and could even trigger a new round of yield declines. Additionally, as banks' liability pressure eases, certificate of deposit (CD) issuance will decline, opening up room for long-end bond yields to fall.

Editor: Wang Zhe