Core Viewpoint - The bond market has experienced an upward fluctuation in interest rates since July, with the current yield spread between long-term bonds and government bonds widening to levels seen before 2024, indicating a shift in investor sentiment towards a preference for absolute yields rather than duration [1][2][3] Group 1: Market Trends - The yield spread between 30-year government bonds and 10-year government bonds has widened to 32 basis points, while the spread between 10-year policy bank bonds and government bonds is at 16 basis points, reflecting a significant change in market dynamics [1] - The bond market is likely to maintain a weak oscillating pattern, with trading strategies shifting from duration-based bets on interest rate cuts to a focus on absolute returns and coupon logic [2] - The liquidity premium for long-duration, high-liquidity bonds may shrink, necessitating higher absolute yields to attract investors [2] Group 2: Monetary Policy Impact - The central bank's monetary policy is currently more supportive of short- to medium-term bonds, with limited impact on long-term bonds, as evidenced by recent operations in the open market [3] - The central bank's actions, including a net increase of 300 billion yuan in reverse repos in September, indicate a focus on maintaining stable liquidity in the banking system [3] - The widening of yield spreads for long-term bonds suggests a gradual clearing of pricing bubbles related to duration and elasticity, with potential structural opportunities emerging in shorter-term bonds [3]

Core Viewpoint - The recent policy adjustment by the Ministry of Finance and the State Taxation Administration to reinstate VAT on interest income from newly issued government bonds, local government bonds, and financial bonds starting August 8 is expected to have a significant impact on institutional behavior and the bond market dynamics, leading to a widening spread between new and old bonds [3][4][7]. Summary by Sections Policy Changes - Starting August 8, interest income from newly issued government bonds, local government bonds, and financial bonds will be subject to VAT, with a rate of 6% for banks and 3% for asset management products. Existing bonds issued before this date will remain exempt from VAT until maturity [3][4][6]. Market Reactions - Following the announcement, the bond market reacted with a quick rise in yields, followed by a sharp decline, reflecting mixed investor sentiment regarding the tax implications [5][8]. Institutional Impact - Financial institutions, particularly banks, are expected to adjust their investment strategies in response to the new tax regime. The certainty of tax liabilities on interest income may lead banks to increase their external investment scale to mitigate the impact on returns [11][12]. Tax Revenue Projections - The tax adjustments are projected to generate additional tax revenue of approximately 321 billion, 648 billion, and 988 billion from 2025 to 2027, respectively. In a steady state, the annual tax revenue could reach about 208.6 billion if the current bond stock is taxed [9][10]. Spread Dynamics - The policy is likely to create a widening spread between new and old bonds, as the new bonds will carry a tax burden that the older bonds do not. This could lead to a dual pricing mechanism in the market, with institutions favoring older bonds to avoid the new tax implications [10][13][14]. Long-term Market Trends - The tax changes may lead to a structural shift in the bond market, with funds potentially flowing towards credit assets and equities, as the attractiveness of taxable bonds diminishes. The overall impact on bond yields is expected to be limited, with estimates suggesting a yield impact of around 5 to 10 basis points [12][14].