Original Source: BCC Global
Date: December 24, 2024
Introduction
For China’s bond market, 2024 was a year filled with both challenges and opportunities. Amid global economic recovery pressures and weak domestic economic expectations, China’s bond market witnessed an unexpected bull run. On December 23, the market continued to rally, with the 10-year treasury yield falling further to 1.675%, breaking below 1.7%. For the first time in 15 years, the 1-year treasury yield dropped below 1.0%.
What does the ongoing decline in treasury yields signify, and how does it affect the market?
2024 Bond Market Performance Overview
On January 9, the 10-year treasury yield fell below 2.5% for the first time, dropping to 2.49%—the lowest since April 2020. While yields briefly rose in April, August, and late September, the overall trend remained downward. Key milestones in the declining trend:
- February 23: Yield dropped below 2.4%.
- March 6: Dropped below 2.3%.
- July 1: Fell below 2.2%.
- September 12: Broke the 2.1% threshold.
- December 3: Yield fell below 2.0%, marking the beginning of the “1% era.”
Reasons Behind the Bull Run
The robust performance of the bond market in 2024 can be attributed to several factors:
- Demand for Asset Allocation
Institutional investors, such as insurance companies, faced declining high-interest deposit rates and reduced returns from real estate and municipal bonds, prompting them to shift toward treasuries as a safer investment option. - Slowing Economic Growth
Weaker economic growth resulted in lower investment returns, further boosting demand for fixed-income assets. - Fiscal Policy Measures
Debt-swapping initiatives replaced low-credit bonds with high-credit bonds and high-interest bonds with lower-interest ones, driving treasury yields lower. - Market Liquidity and Year-End Activity
Ample liquidity and year-end “window dressing” by institutional investors led to increased trading activity, contributing to the continued drop in treasury yields.
China’s monetary policy, which mirrored the global trend of easing, also played a key role. The central bank lowered reserve requirement ratios (RRRs) and interest rates to boost liquidity and ease corporate financing pressures, directly contributing to the decline in treasury yields.
Market Outlook
Whether the bull run in the bond market will continue is now the primary concern for market participants. Experts suggest that further declines in treasury yields may be limited due to the following factors:
- Policy Support and Economic Recovery
The continued implementation of policies aimed at stabilizing and stimulating the economy may lead to gradual economic recovery, which could limit the downward trend in interest rates. - Increased Bond Supply
Active fiscal policies may lead to an increase in bond issuance, particularly in the context of debt replacement efforts. An increased supply of bonds may place upward pressure on yields. - Improved Market Sentiment and Corporate Earnings
As the economy recovers, corporate earnings may improve, and positive policy support could buoy equity market sentiment, potentially limiting further declines in yields.
Industry Reports and Analysis
According to a report by Huaxi Securities, there are signs that resistance to lower long-term rates is building:
- Regulatory intervention may be introduced to stabilize long-term yields.
- Bond funds have extended their portfolio duration, indicating increased speculative trading sentiment.
- Market liquidity could face pressures related to upcoming tax payments.
Additionally, December marks key political events such as the Central Economic Work Conference, where the announcement of new stimulus policies could increase risk appetite, potentially suppressing bond market performance.
CE Fund analysts suggest that while monetary policy remains accommodative, the upcoming “Two Sessions” in Q1 may introduce fiscal measures that could impact bond markets. The firm expects that the most favorable period for declining interest rates has passed and anticipates more range-bound fluctuations rather than a continuation of the unilateral decline.
Impact on the Stock Market
Traditionally, there is an inverse correlation between the bond market and the stock market, often referred to as the “seesaw effect.” The recent drop in the 10-year treasury yield below 2.0% raises questions about its implications for equities.
A CITIC Securities report highlights that expectations of continued monetary easing could drive long-term interest rates even lower, leading to a scarcity of high-yield assets and making stocks more attractive.
- Key Point: Lower expected returns from wealth management products and deposits have led to a surge in household savings, increasing available investment capital. If the equity market demonstrates robust returns, this influx of capital could significantly boost A-shares.
Dongwu Securities adds that the timing of economic recovery will determine the emergence of the “seesaw effect” between stocks and bonds. Until recovery takes hold, ample liquidity could sustain simultaneous strength in both markets.
Conclusion
In 2024, China’s bond market demonstrated remarkable resilience amid global uncertainties. However, while monetary easing supported the bull market, questions remain about its sustainability as fiscal policies take effect and economic recovery accelerates. Moving forward, market participants should closely monitor policy changes, corporate earnings, and economic data to gauge the future trajectory of both the bond and stock markets. In an environment of fluctuating interest rates, investors must remain vigilant to adapt to market dynamics and seize emerging opportunities.
[Disclaimer]: The content above represents a summary of publicly available information, expert opinions, and BCC research. It does not constitute investment advice. BCC assumes no liability for any losses resulting from the use of this information. Investors should exercise caution.