The bond market in China has recently been experiencing a notable downturn, triggering discussions about the so-called "seesaw effect" between stocks and bondsAs equity markets gain traction, the bond market finds itself under pressure, leading to significant adjustments across various maturitiesFor instance, on February 18, there was a sharp drop in 30-year treasury futures by nearly 1%, marking a continuous decline over several trading days since February 14. This downward trend was echoed in other tenures as well, with 10-year, 5-year, and 2-year treasury futures also reporting drops.

Market analysts attribute this slump to tightening liquidity conditions that have persisted since the beginning of the yearThere has been a significant increase in social financing and credit, which seems to cast a shadow over the bond marketFurthermore, the technology sector's impressive performance has heightened a seesaw dynamic, impacting investor sentiment significantlyThis phenomenon highlights the intricate relationship between these two asset classes, especially in responding to macroeconomic signals.

The bond market's recent adjustments are starkly juxtaposed against the rally observed in the A-share market, which has been characterized by volatility yet an upward trajectoryBy the midday close on February 18, all national treasury futures had recorded lossesSpecifically, the 30-year treasury future closed at 119.42 yuan after declining by 0.95%, while the 10-year, 5-year, and 2-year treasuries reflected similar declines in their respective futures data.

Since February 14, the cumulative price drop of the 30-year treasury future has approached 2%, with corresponding drops of 0.7% and 0.45% for the 10-year and 5-year treasury futuresAt the same time, yields have been climbing steadilyAs of February 18, the yield on the 30-year treasury stood at 1.9195%, up by 2.95 basis points, with the 10-year yield rising to 1.7025%, which is an increase of 3.25 basis points

Advertisements

Other durations, including the 1 to 7-year treasuries, similarly reflected rising yields.

According to Huaxi Securities, the recent pressure on the bond market has largely stemmed from the market pricing in the adverse impacts of stock market rallies and the expectations surrounding wider credit availability due to increased social financingA report from the People’s Bank of China (PBoC) indicated a robust rise in loans, with a notable increase in January's total loans reaching 5.13 trillion yuan, outperforming market predictionsThe social financing growth reached 7.06 trillion yuan, again surpassing expectations, contributing further to market dynamics.

Market observers from CITIC Securities observed that the ongoing implementation of policies aimed at steady growth is significantly impacting credit conditions, thus providing ample government debt supply and fostering investments, especially in infrastructureAs credit conditions remain loose, with expectations for further easing, investors may seek enhanced returns, leading to higher bond yields and subsequently lower bond prices.

Minmetals Futures suggested that there appeared to be a "policy rush" at the end of last year, which was influenced by a consensus among institutions favoring a bullish stance on the bond marketHistorically, such uniformity in perspectives often concludes with unexpected market reversals, underscoring a fragile equilibrium in market sentiment.

Looking ahead, Huaxi Securities believes that the bond market is now at a critical juncture where four key factors could play influential rolesFirst is the funding environmentThe central bank's stance appears slightly altered this year, and the crucial question remains whether month-end easing traditions will holdA shift to a looser liquidity environment could offer rapid recovery for the bond markets if funding rates remain stable below 1.8%. However, any continuation of tight conditions could persistently pressurize the bond market.

Second, the fundamental economic backdrop; the substantial increase in social financing and credit in January could weight negatively on the bond market

Advertisements

Recent financial data revealed an alarming rise in corporate loans, resulting in immediate upward adjustments to treasury yields, particularly affecting the 10 and 30-year bonds.

The coexistence of a tech bull market alongside bonds is also a phenomenon to watchDespite the prevailing "money-making" sentiments in the stock market primarily concentrated within the tech field, the bond market might withstand pressure if the broader market fails to show significant thrustThus, the seesaw dynamics between equities and bonds are particularly highlighted in this context.

Lastly, data from Puyoo Standard suggests a substantial increase in the scale of bank wealth management products that surged by 760 billion yuan, pointing to a cautious approach among investors post the recent volatile trading scenarios in the bond marketThis may translate into a restrained demand that could counteract rising yields, presenting an essential resistance point for interest rates.

In summary, it appears that the current landscape of the bond market is marked by considerable uncertainty, influenced by various macroeconomic factors, market dynamics, and policy directionsThe challenges posed by rising interest rates, volatile market sentiments, and fundamental economic shifts create an intricate tapestry that both investors and analysts must navigate with careAs the situation continues to unfold, it remains imperative for stakeholders to closely monitor these interconnected variables to best anticipate potential shifts in the market landscape.

Advertisements