Report Industry Investment Rating - No information provided in the report Core Views - This week, the bond market operated steadily with a significant expansion in issuance scale. A total of 881 interest rate bonds and credit bonds were issued, with a total issuance amount of 1,188.874 billion yuan, indicating strong financing demand from various entities. The cumulative trading volume in the bond market was 77.2 trillion yuan, and the trading turnover reached 79.6 trillion yuan, with the average daily trading volume stable above 1.5 trillion yuan, showing abundant market liquidity and high trading activity [7]. - In the inter - bank market, the yields of major interest rate bonds generally declined, and market sentiment was positive. The short - end yields of 1 - year and 3 - year Treasury bonds were stable, fluctuating within the range of 1.3% - 1.33%, while the 30 - year ultra - long special Treasury bond yield dropped to 2.2180%, a recent low. The duration center of bond funds rose to 3.1 years, and the leverage ratio of non - bank institutions increased, indicating stronger allocation willingness [7]. - In the past month (from November 29 to December 28, 2025), the yields of credit bonds declined by 0.64% overall. The decline in the medium - short - term (1 - 3 years) yields was significantly higher than that in the long - term (5 years and above), which only decreased by 0.13%. High - grade credit bonds such as AAA - rated medium - short - term notes and high - quality urban investment bonds remained attractive [7]. - As of December 26, 2025, the spread between 3 - year corporate bonds and the same - term Treasury bonds narrowed to 46.84BP, reflecting the market's more optimistic pricing of the credit risk of medium - and high - grade credit bonds and continuous strengthening of allocation [7]. - This week, the central bank mainly conducted net repurchase operations in the open market, with a net repurchase of 45 billion yuan. The operating interest rate remained stable at 1.40%. The market's expectation of a reserve requirement ratio cut or interest rate cut in January 2026 has increased [9]. - It is expected that in 2026, fiscal policy will be significantly front - loaded, especially in the first half of the year. The estimated issuance scale of local government special bonds is about 4.4 trillion yuan, and the estimated issuance scale of special Treasury bonds is about 1.3 trillion yuan [9]. Summaries According to Relevant Catalogs Bond Market Operation - This week, 881 interest rate bonds and credit bonds were issued, with a total issuance amount of 1,188.874 billion yuan. The cumulative trading volume was 77.2 trillion yuan, and the turnover was 79.6 trillion yuan, with an average daily trading volume above 1.5 trillion yuan [7]. - The yields of major interest rate bonds in the inter - bank market generally declined. The 1 - year and 3 - year Treasury bond yields were stable at 1.3% - 1.33%, and the 30 - year ultra - long special Treasury bond yield dropped to 2.2180% [7]. - In the past month, the yields of credit bonds declined by 0.64% overall, with the medium - short - term yields dropping more significantly than the long - term ones. High - grade credit bonds and high - quality urban investment bonds were attractive [7]. - As of December 26, 2025, the spread between 3 - year corporate bonds and the same - term Treasury bonds narrowed to 46.84BP [7]. Central Bank Operations and Market Expectations - This week, the central bank conducted 422.7 billion yuan of reverse repurchase operations, with 457.5 billion yuan of reverse repurchases maturing, resulting in a net repurchase of 34.8 billion yuan [48]. - The central bank's net repurchase did not change the direction of loose money. The market's expectation of a reserve requirement ratio cut or interest rate cut in January 2026 has increased [9]. Fiscal Policy Expectations - In 2025, 500 billion yuan of local special bond balance limits were issued. It is expected that in 2026, fiscal policy will be significantly front - loaded, with an estimated issuance scale of local government special bonds of about 4.4 trillion yuan and an estimated issuance scale of special Treasury bonds of about 1.3 trillion yuan [9]. Market Liquidity - Recent market liquidity has been unexpectedly loose, with short - term interest rates continuously falling. The weighted average interest rate of DR001 slightly decreased and continued to operate below 1.26%, while DR007 slightly increased by about 4bp due to year - end factors [36]. Foreign Bond Markets (US) - The US federal funds target rate and effective federal funds rate remained at a high level, with the federal funds target rate at 5.25% - 5.50% [78]. - The yields of US Treasury bonds showed certain fluctuations, and the spreads between different maturities also changed [83][85].

Group 1 - The bond market has experienced changes in liquidity, with short-term interest rates declining and long-term yields showing reduced volatility, indicating a steepening yield curve [2][3] - Short-term rates reflect market expectations for policy easing, driven by structural issues in China's economic growth, such as weak consumption and declining real estate sales, suggesting a continued need for a loose monetary environment [2][3] - The supply-demand dynamics for long-term bonds have shifted, with an increase in the issuance of ultra-long bonds, particularly local government bonds, leading to a significant rise in the proportion of long-term bonds in the market [3] Group 2 - Short-term liquidity easing is crucial for the stock market, as it indicates ongoing support for economic growth and can lower financing costs for leveraged funds, potentially increasing risk appetite among investors [4] - The decline in short-term interest rates may lead to a continued shift of household asset allocation towards the stock market, as high-yield assets become scarcer [4]

Core Insights - The People's Bank of China (PBOC) reported that as of September 2025, foreign institutions held 3.78 trillion yuan in the interbank bond market, accounting for 2.2% of the total custody volume [1] - The report indicates a significant increase in the number of foreign institutions entering the market, with 11 new entities in September alone, contributing to a total of 1,176 foreign institutions [3] - The introduction of a new bond repurchase mechanism for foreign investors is expected to enhance market liquidity and attract more foreign capital into the domestic bond market [6][7] Group 1: Foreign Investment in Bond Market - As of September 2025, foreign institutions held 2.00 trillion yuan in government bonds, 0.77 trillion yuan in policy financial bonds, and 0.86 trillion yuan in interbank certificates of deposit [1][3] - The number of foreign institutions participating in the bond market has increased, with 11 out of 15 new entrants in the third quarter joining in September [3] - The trading volume of foreign institutions in the interbank bond market was approximately 0.96 trillion yuan in September, with an average daily trading volume of about 41.7 billion yuan [1] Group 2: Market Dynamics and Trends - The trading volume of foreign institutions in September showed a slight decline to 0.83 trillion yuan from 0.87 trillion yuan in August, indicating a limited contraction in overall trading activity [3] - Commercial banks maintained a dominant position in the bond market, with a trading volume of 24.46 trillion yuan in September, while securities companies saw a decrease in trading volume [4] - The new bond repurchase policy allows foreign institutions to engage in repurchase transactions, enhancing the liquidity management tools available to them [6][7] Group 3: Impact of New Regulations - The new regulations are expected to diversify the types of investors in the bond market, including foreign central banks, international financial organizations, and various financial institutions [6] - The introduction of the repurchase mechanism is anticipated to reduce transaction friction and enhance the willingness of foreign institutions to hold bonds [7] - The repurchase business is expected to improve the pricing efficiency of the domestic bond market by reflecting overseas capital market expectations [8]

Core Viewpoint - The People's Bank of China, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange have jointly issued an announcement to further support foreign institutional investors in conducting bond repurchase transactions in the interbank bond market [1] Group 1: Announcement Details - The announcement addresses the operational differences between China's pledge-style bond repurchase and international market practices, highlighting that the current method does not transfer the pledged bonds from the seller to the buyer but instead freezes them [1] - Foreign institutional investors have expressed a preference for a model that allows for the transfer of pledged bonds and their usability, which aligns with international practices and enhances overall market liquidity [1] Group 2: Transition Period - Following the announcement, foreign institutional investors will adopt the common international practice of bond transfer and usability in their repurchase transactions [1] - To facilitate a smooth transition for foreign institutional investors already engaged in bond repurchase transactions, a 12-month transition period is provided during which these institutions can continue to operate under the original model [1]

Core Points - The Ministry of Finance and the State Taxation Administration announced that from August 8, 2025, interest income from newly issued government bonds, local government bonds, and financial bonds will be subject to value-added tax (VAT) [1][2] - Existing bonds and their subsequent issuances will continue to enjoy VAT exemption until maturity, which limits the overall market impact of this policy change [1][2] - The adjustment is aimed at enhancing the benchmark nature of the government bond yield curve and improving market liquidity by reducing the liquidity premium costs associated with the previous tax exemption [2][3] Summary by Sections Policy Adjustment - The new VAT policy applies strictly to newly issued bonds after August 8, 2025, while existing bonds retain their tax-exempt status until maturity [2] - The government bond and financial bond stock and new issuance scale for 2024 are projected to be 122 trillion yuan and 33 trillion yuan, respectively, with new issuances accounting for less than 30% of the total stock [2] Market Impact - The VAT rate is set at 6%, and the policy change primarily affects domestic investors, excluding interbank certificates of deposit, which mitigates overall market pressure [2] - The previous tax exemption led to lower trading activity and higher liquidity premiums, which the new policy aims to address by increasing trading volume and reducing tax disparities among different financial assets [2][3] Financial Market Functionality - Unifying the tax standards across different types of bonds and financial assets will enhance the comparability of government bond yields with other financial instruments, thereby improving the pricing benchmark function of the government bond yield curve [3]