On the global financial landscape, the emergence of DeepSeek has captivated market attention, as this innovative entity continues to dominate trends post-holidayMeanwhile, the bond market finds itself in a contrasting state, displaying a mixed performance amidst fluctuating conditions.

Is the once buoyant bond market entering a headwind phase? Investors holding bond funds are now left pondering how best to navigate the recent shifts.

01

Pros and Cons: A Delicate Balance

On the first trading day after the holiday, long-term bonds kicked off with strong momentum, leading to a generally bullish trend in the bond sector in the days that followedHowever, as time progressed, the bond market began to falter, overshadowed by the rising equities market and the soaring appeal of gold, ultimately slipping into a phase of consolidation.

A convergence of bullish and bearish forces shapes the perplexing landscape we currently witness.

Favorable Factors

The central bank’s accommodative monetary policy stance remains unchanged and expectations for monetary easing continue to loom large.

Signals from local two sessions convey a more proactive fiscal policy approach.

Recently published manufacturing PMI data reflects that the underlying recovery momentum remains weak, indicating that economic growth continues to face challenges, which provides support for the bond market.

The “Headwind” Effect

A tightening liquidity environment has emerged

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Although funds post-holiday are gradually loosening, the anticipated monetary easing has yet to materialize, compounded by exchange rate pressures leading to a bearish flattening of the bond yield curveMarket expectations for interest rate cuts are likely deferred until after the two sessions, indicating that significant improvement in liquidity is improbable in the short term.

Market congestion and profit-taking pressures are notableFollowing policy cues from last year's high-level meetings, the market preemptively traded expectations for loose monetary policies; as the 10-year government bond approached a historic low near 1.6%, risks of a pullback have consolidated.

The stock-bond see-saw phenomenon continuesCurrently, the spring rally in the equity market persists, with a heightened market risk appetite causing disturbances in the bond market, where investor sentiment appears fragile.

Beyond these two contending forces, the bond market faces additional pressures ahead.

Increasing supply is on the horizonIn February, the government plans to net issue 1.5 trillion yuan in bonds (an increase of 880.8 billion yuan year-on-year), exerting significant pressure on the market post-two sessions.

Domestic demand remains resilientAlthough the January PMI data reflects a drop, consumer figures during the Spring Festival exceeded expectations, suggesting that a short-term rebound in risk appetite may divert funds away from the bond market.

External disturbances should not be ignored

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A strategic interplay surrounding the timing of interest rate cuts by the Federal Reserve indirectly constrains the downward trajectory of domestic interest rates.

Overall, the key issue impacting the movement of the bond market stems from liquidity constraints, and the efficacy of interest rate reductions as a liquidity provision method remains to be seen, with the next critical juncture pointing towards the two sessions.

02

How Do Past Windows Play Out?

The interval between earnings releases and the two sessions operates within a data and policy “vacuum” period, while the two sessions represent an essential milestone for domestic policy and economic objective alignmentThis is precisely where the bond market seeks directional clarity.

Reflecting on the bond market’s performance in the previous five years surrounding the two sessions reveals that prior to the conference, the market often attempts to “front-run” with price expectations; within two weeks of conference commencement, long-term rates generally exhibit a slight upward trendIf no significant unexpected information arises post-conference, rates naturally revert to correction.

How will this year’s stock-bond relationship unfold? The key lies in understanding the underlying rationale for the stock market rally —

If driven by solid fundamentals alongside tightening monetary policy, a “bullish stock-bearish bond” scenario may result;

Recent stock market gains predominantly stem from emotional recovery, emphasizing structural trends over macroeconomic conditions.

While the “profitability effect” remains strong, with earnings concentrated in technology and small-cap sectors, this is less impactful on the bond market compared to the significant shocks observed during previous rallies.

If a robust technology-driven rally fails to resonate with the broader market, the potential repercussions for the bond market may be limited.

03

What Lies Ahead for Bond Holders?

As the markets await earnings and policy shifts, how will bondholders safeguard their investments?

Historically, there’s no need to overly concern oneself with bond market adjustments, as adjustments do not equate to losses for bond funds.

From a return perspective, the income from bonds derives from two primary sources:

Bond Interest: The Cornerstone of Bonds

Interest earned is calculated based on coupon rates, guaranteeing stable cash flow contingent upon no defaults.

Capital Gains: Pricing Fluctuations in the Market

With bonds tradable on secondary markets, profit can be realized from price differences upon buy and sell transactions

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