Market Performance - The majority of government bond futures closed higher, with the 30-year main contract down 0.04% at 119.330 yuan, the 10-year main contract flat at 108.555 yuan, the 5-year main contract up 0.02% at 105.775 yuan, and the 2-year main contract up 0.02% at 102.370 yuan [1] - The yields on major interbank bonds mostly declined, with the 30-year government bond "25 Super Long Special Government Bond 02" yield down 0.05 basis points, the 10-year policy bank bond "25 Policy Bank 10" yield up 0.1 basis points, the 10-year government bond "25 Coupon Government Bond 11" yield down 0.7 basis points, and the 5-year policy bank bond "25 Policy Bank 08" yield down 0.75 basis points [1] Funding Situation - The central bank announced a fixed-rate, quantity tender operation of 138.5 billion yuan for a 7-day reverse repurchase on August 6, with a bidding amount of 138.5 billion yuan and a winning amount of 138.5 billion yuan. On the same day, 309 billion yuan of reverse repos matured, resulting in a net withdrawal of 170.5 billion yuan [2] - The central bank's open market has continuously net withdrawn funds, which does not hinder the loose funding situation in the interbank market, with the overnight repurchase rate slightly rising but still hovering around the low point of 1.31% [2] Operational Suggestions - The impact of the new bond tax regulations on the market has diminished, with futures supported by a loose funding environment mostly fluctuating upwards. It is expected that in early August, the political bureau meeting will conclude, and the results of the China-US negotiations will temporarily settle, leading to a reduction in domestic and foreign policy negatives [3] - Additionally, the early-month funding expectations are turning loose, and the new bond tax regulations are expected to benefit older bonds that do not incur interest value-added tax. The high-frequency data indicates that there are no significant changes in economic structure, and the short-term PPI is rising while demand remains stable, which may not drive bond market interest rates up in the near term. Therefore, it is anticipated that bond futures may have a chance to fluctuate upwards in early August, with opportunities to buy on dips and a focus on July economic data [3]

Tax Policy Changes - On August 1, 2025, the Ministry of Finance announced the resumption of value-added tax (VAT) on interest income from newly issued government bonds, local government bonds, and financial bonds starting August 8, 2025[1] - Existing bonds issued before this date will continue to be exempt from VAT until maturity, creating a "new and old distinction" in tax application[6] Reasons for Tax Resumption - The historical mission of the tax exemption policy has been completed, as the bond market has grown significantly, now ranking second globally[3] - The resumption aims to adjust the funding structure and prevent excessive liquidity from being trapped in interest-bearing bonds, thereby increasing fiscal revenue and alleviating fiscal pressure[4] Financial Impact - The short-term revenue from the resumption of VAT on interest income is estimated to be around 34 billion yuan[5] - The tax revenue is expected to increase further as the scale of new debt issuance expands over time[5] Market Implications - In the short term, the resumption of VAT is likely to push interest rates down and create pricing differences between new and old bonds[8] - Long-term effects may be bearish for interest-bearing bonds as the cost advantage diminishes, potentially shifting investment towards credit bonds and dividend assets[8] Market Trends - Since mid-July, bond market volatility has increased significantly, influenced by liquidity conditions and strong stock market performance[9] - The 10-year government bond yield has fluctuated, reaching a high of approximately 1.75%[9]

Tax Policy Changes - The new tax policy will impose VAT on interest income from newly issued government bonds, local government bonds, and financial bonds starting from August 8, 2025[1] - Existing bonds issued before this date will continue to be exempt from VAT until maturity[1] Current Tax Rules - Public funds enjoy full tax exemptions on interest income and capital gains for government and local bonds[2] - Non-public asset management products are exempt from VAT on interest income but subject to 3% VAT and 25% income tax on capital gains[2] Fiscal Intent and Impact - The tax adjustment aims to alleviate fiscal pressure, as tax revenue has seen negative growth in 2020 (-2.3%), 2022 (-3.5%), and 2024 (-3.4%)[3] - In the first half of 2025, tax revenue was 9.29 trillion yuan, down 1.2% year-on-year[3] Affected Institutions - Banks will face a 6% VAT on interest income from government, local, and financial bonds[4] - Public funds may continue to enjoy tax exemptions, while non-public asset management institutions could see VAT on interest income return to 3%[4] Market Pricing Dynamics - The bond market may experience dual pricing for old and new bonds, with old bonds likely to see increased demand due to tax exemptions[6] - New bonds issued after August 8 may be priced based on similar existing bonds, with a potential markup of 1.05-1.06 times[6]