Report Industry Investment Rating - The report does not mention the industry investment rating. Core Viewpoints of the Report - In December 2025, the weakening of the US dollar and the improvement of risk appetite led to a steeper curve overseas, while in China, loose funds drove the yield curve to steepen. The bond market remained volatile due to the supply - demand contradiction at the long end [2]. - In 2026, the PPI is facing three positive factors: the tail - lifting factor, imported inflation, and the continued effectiveness of the "anti - involution" policy. Under the neutral scenario, the PPI is expected to turn positive in the second quarter of 2026 and reach around 1.2% by the end of the year. The mild re - inflation needs to resonate with other factors to significantly affect the bond market [3][55]. - Currently, the bond market is in a wait - and - see state. It is expected to remain volatile in the short term, lacking the motivation and space for trend trading. There are some structural opportunities, such as the follow - up rise opportunity of 5 - 7Y China Development Bank bonds and the compression opportunity of credit spreads [4]. Summary by Directory PART1: December 2025 - Curve Steepening Driven by Overseas and Domestic Factors Overseas - In December 2025, the Fed announced reserve management - style purchases (RMP) and continued to cut interest rates. The US dollar index weakened, liquidity improved, the US stock market rose, and risk appetite recovered. The US bond yield curve steepened due to factors like Fed's short - term bond purchase, market concerns about Fed independence, and rising commodity prices. Precious and industrial metals performed well, with copper benefiting from AI demand and gold and silver supported by geopolitical events [10][16]. Domestic - In November 2025, the domestic economic fundamentals showed a divergence between quantity and price, and in December, both supply and demand declined. The capital market was generally loose, and the overnight interest rate hit a new low for the year. The bond market remained volatile due to the long - end supply - demand contradiction, and the yield curve steepened [17][23]. - In terms of institutional behavior, large banks and insurance companies, as allocation players, increased their bond - buying in the secondary market in December. Large banks added some policy - related financial bonds and focused on 5 - 7 - year varieties. Insurance companies mainly added long - term treasury bonds. Trading players became conservative. Rural commercial banks mainly invested in certificates of deposit, funds reduced duration and mainly sold long - term treasury bonds, and wealth management products seasonally reduced bond allocation and slightly increased credit bond allocation [26][35][47]. PART2: How the 2026 Re - inflation Narrative May Affect the Bond Market 2026 PPI's Three Positive Factors - The tail - lifting factor can support the PPI to turn positive in the second half of 2026 even without new price - increasing factors [55]. - Imported inflation may occur as overseas capital expenditure and manufacturing investment are likely to rise in 2026. The US deficit rate may expand, and the Fed's new round of easing may release emerging market countries' capital expenditure demand [57]. - The "anti - involution" policy has shown a supporting effect on the PPI. Since August 2025, the month - on - month PPI of the mining industry has turned positive, driving the overall PPI to turn positive since October [60]. PPI Forecast under Different Scenarios - Under the pessimistic scenario, the PPI is expected to turn positive in the second half of 2026 with an average monthly PPI growth rate of 0%. Under the neutral scenario, with a monthly average PPI growth rate of 0.1%, the PPI is expected to turn positive in the second quarter of 2026 and reach around 1.2% by the end of the year. Under the optimistic scenario, with a monthly average PPI growth rate of 0.2%, the PPI is expected to turn positive in April 2026 and exceed 2% in the second half of the year [67]. PPI's Impact on the Bond Market - Historically, during the four PPI upward cycles since 2009, three typical upward periods were driven by the resonance of domestic and overseas demand or supply - demand. The PPI and the bond market generally move in the same direction, but there were several periods of divergence, mainly due to strong economic recovery expectations or PPI being mainly affected by the supply side while the domestic demand did not improve significantly and the monetary policy remained loose [69][71]. - In 2026, the mild re - inflation needs to resonate with other factors such as total demand, central bank's capital management, financial institutions' liability - side stability, and the flow of activated household deposits to significantly affect the bond market. The trading of typical total assets based on re - inflation may have limited odds [78]. PART3: Bond Market Strategy for January 2026 - In January 2026, the bond market may still be in a wait - and - see period. Potential risks include government bond supply pressure, the spring rally in the equity market, and the first - quarter credit boom. Potential positive factors include the possible relaxation of large banks' bond - allocation pressure and the relatively loose capital market, with a higher probability of a reserve - requirement ratio cut than an interest - rate cut in January [81]. - The bond market is expected to remain volatile in the short term, lacking the motivation and space for trend trading. Structurally, there are opportunities such as the follow - up rise of 5 - 7Y China Development Bank bonds and the compression of credit spreads in credit bonds [4][83].

1. Report Industry Investment Rating The provided content does not mention the industry investment rating. 2. Core Viewpoints of the Report - The trading sentiment in the bond market this week was cautious. The trading volume of funds in the first half - week was small, and the duration of interest - rate bond funds decreased significantly. The purchasing power of the allocation portfolio remained weak, and the bullish power in the bond market was limited [9]. - The bond market vitality index continued to rise slightly. The index was compiled based on the historical quantile levels of bond market leverage ratio, turnover rate, bond fund duration, and the implied tax rate of China Development Bank bonds since 2022 and their correlation coefficients with the bond market trend [10]. - Most interest - rate bond funds have recorded negative returns in the past three months. Since August, the scale of equity funds has slightly declined, while the scale of bond funds has slightly increased. The issuance of newly established bond funds this week was still at a low level [89]. 3. Summary by Relevant Catalogs 3.1 Overall Sentiment - The bond market vitality index continued to rise slightly. As of September 5, the bond market vitality index increased by 2 pcts to 45% compared with August 29, and the 5D - MA increased by 5 pcts to 41% [10]. - Indicators of rising bond market vitality included the trading volume of the active 10Y China Development Bank bond / the balance of 9 - 10Y China Development Bank bonds (the rolling two - year quantile increased from 41% to 63%) and the turnover rate of 30Y treasury bonds (the rolling two - year quantile increased from 24% to 47%) [12]. - Indicators of falling bond market vitality included the median duration of medium - and long - term pure bond funds (the rolling two - year quantile decreased from 99.5% to 92.7%), the implied tax rate of 10 - year China Development Bank bonds (reverse) (the rolling two - year quantile decreased from 81% to 66%), and the excess level of the inter - bank bond market leverage ratio compared with the average of the past four years (the rolling two - year quantile decreased from 11% to 9%) [13]. 3.2 Institutional Behavior 3.2.1 Buying and Selling Strength and Bond Selection - In the current bond market, the order of net buying strength was funds > other product types > large banks > insurance > others > wealth management > rural financial institutions > foreign - funded banks > money market funds, and the order of net selling strength was joint - stock banks > city commercial banks > securities firms. For ultra - long bonds (bonds with a maturity of over 15 years), the order of net buying strength was insurance > funds > other product types > others > foreign - funded banks, and the order of net selling strength was large banks > joint - stock banks > rural commercial banks > securities firms > city commercial banks > wealth management [20]. - Different institutions had different bond preferences. Large banks mainly focused on 3 - 5Y interest - rate bonds; rural commercial banks, insurance companies, and wealth management products had no obvious main bond types; funds mainly focused on 1 - 3Y and 3 - 5Y interest - rate bonds; other product types mainly focused on 3 - 5Y interest - rate bonds [20][25]. 3.2.2 Trading Portfolio - As of September 5, the mean and median durations of the full - sample medium - and long - term pure bond funds decreased by 0.23 years and 0.31 years respectively compared with August 29, reaching 4.40 years and 4.21 years, and were at the 92.7% rolling two - year quantile [38]. - The median durations of pure interest - rate bond funds, interest - rate bond funds, and credit bond funds decreased by 0.64 years, 0.62 years, and 0.13 years respectively, reaching 5.10 years, 4.84 years, and 3.93 years, and were at the 90.0%, 90.0%, and 94.4% rolling two - year quantiles respectively [38][40]. - The median durations of high - performing interest - rate bond funds and credit bond funds decreased by 0.57 years and 0.09 years respectively, reaching 6.40 years and 4.54 years [40]. 3.2.3 Allocation Portfolio - The primary subscription demand for treasury bonds and policy - financial bonds was differentiated this week, with the demand for ultra - long bonds rising. The weighted average full - market multiples of treasury bonds decreased from 2.69 times to 2.66 times, while those of policy - financial bonds increased from 3.02 times to 3.54 times. For bonds with a maturity of 10Y and above, the weighted average full - market multiples of treasury bonds increased from 2.69 times to 3.02 times, and those of policy - financial bonds increased from 2.77 times to 3.74 times [54]. - Large banks' net buying of 1 - 3Y treasury bonds decreased in August. As of September 5, the cumulative net buying of 1 - 3Y treasury bonds this year was 6206 billion yuan [61]. - Rural commercial banks' cumulative net buying of bonds this year was significantly weaker than in previous years, mainly due to the weak net buying of short - term bonds within 1Y. However, the net buying of 7 - 10Y and over 10Y bonds was significantly higher than in previous years [71]. - Insurance companies' net buying of bonds was significantly higher than in previous years, mainly due to the strong buying of ultra - long bonds over 10Y. As of September 5, the ratio of cumulative net bond buying to cumulative premium income reached 45.95%, exceeding 42.62% at the end of September last year [78]. - Wealth management products' net buying of bonds in the secondary market had a slightly lower duration this week but remained at the highest level since February 23, 2024. As of September 5, the weighted average duration of cumulative net bond buying was 1.75 years, a decrease of 0.02 years compared with August 29 [86]. 3.3 Asset Management Product Tracking - Since August, the scale of equity funds has slightly declined, while the scale of bond funds has slightly increased. In September, the scale of bond funds and equity funds increased by 155 billion yuan and decreased by 305 billion yuan respectively compared with the previous month [89]. - The issuance of newly established bond funds this week was still at a low level, with a scale of only 32 billion yuan, down from 48 billion yuan in the previous week [89]. - This week, the net value increases of various types of bond funds have generally expanded, with credit bond funds performing better. The median annualized returns of pure interest - rate bond funds, interest - rate bond funds, and credit bond funds in the past week were 4.0%, 3.6%, and 3.8% respectively. Most pure interest - rate bond funds and interest - rate bond funds have recorded negative returns in the past three months [89].