1. Report Industry Investment Rating There is no information provided regarding the report industry investment rating. 2. Core Viewpoints of the Report - The bond market is still "widely bearish," but it is likely to be a bull market. The upper limit of bond market interest rates is clear. The 10 - year Treasury bond rate above 1.8% has absolute value, and the downward space of bond market interest rates is at least 20bp. There are opportunities for the narrowing of the spreads of ultra - long bonds and variety spreads [2]. - The logic of the upper limit of interest rates comes from the weak fundamentals, asset shortage, and the need to cooperate with fiscal policies. The large - scale purchase of 7 - 10y Treasury bonds by large banks in mid - September may reflect the policy intention of maintaining stability in the bond market [2][8]. - Regarding the lower limit of interest rates, the report is firmly bullish. The 1.7% is not an important resistance level. Interest rates are expected to reach new lows under the influence of factors such as the central bank's possible restart of Treasury bond trading, regulatory policies being less than expected, and cross - year allocation [11][12]. - The term spreads in the bond market since 2024 have generally widened, different from the previous narrowing trend. In the future, with the improvement of market sentiment, there will be opportunities for spread compression. The impact of the 500 billion yuan local government debt limit on the bond market is expected to be limited in the short term [3]. 3. Summary According to the Table of Contents 3.1 Is It a Sideways Market or a Bull Market? - There are still significant differences in the market. The short - term view of most investors is that the downward space of interest rates is limited. The lower limit of the 10 - year Treasury bond active bond rate may be 1.7%, and the upper limit is around the previous high of 1.83% [7]. - The long - term view believes that short - term Sino - US trade frictions are beneficial, and the negative factors in the third quarter are weakening. The short - term view believes that Sino - US relations may improve, the stock market is still strong, and regulatory policies will affect the bond market [7]. - The upper limit of interest rates: The 10 - year Treasury bond above 1.8% and the 30 - year Treasury bond above 2.1% have absolute allocation value. The upper limit comes from the weak fundamentals, asset shortage, and the large - scale purchase of 7 - 10y Treasury bonds by large banks in mid - September, which may be a manifestation of the central bank's intention to maintain stability in the bond market and cooperate with fiscal policies [8]. - The lower limit of interest rates: The report is firmly bullish. The 1.7% is not an important resistance level. Interest rates are expected to reach new lows under the influence of factors such as the central bank's possible restart of Treasury bond trading, regulatory policies being less than expected, and cross - year allocation. In extreme cases, the 10 - year Treasury bond rate can refer to the pricing at the beginning of this year plus points, that is, OMO + 10bp [11][12]. 3.2 How to View Spreads in a Sideways Market? - By tracing the sideways markets since 2022 with the 10 - year Treasury bond yield as the standard, 7 time periods are sorted out. Since 2024, the term spreads in the sideways market have generally widened, mainly because the bond bull market since 2024 is usually accompanied by supply pressure or the central bank's attention to long - term interest rates, making the mid - short end relatively safer and more certain [19][24]. - In terms of variety spreads, the spread between policy - financial bonds and Treasury bonds usually narrows, especially at the long end. The credit spreads have decreased significantly in most sideways markets [25]. - Since the end of August 2025, the spread between 5 - year and 2 - year Treasury bonds has declined, while the spreads between 10 - year and 5 - year, and 30 - year and 10 - year Treasury bonds have increased, and the variety spreads have increased rapidly. The reasons include large - scale purchases of medium - term Treasury bonds by large state - owned banks, the reduction of fund duration by public funds, and the weak buying of ultra - long bonds by large and medium - sized banks [31][33]. - Looking forward, the 30 - year Treasury bond rate has a greater downward space, and the variety spreads may also narrow. Insurance funds may increase their purchases of ultra - long bonds when the Treasury bond rate rebounds above 2.1%. With the improvement of bond market sentiment and the end of the cross - quarter period, the buying power of funds and rural commercial banks may return, driving the compression of the spread between policy - financial bonds and Treasury bonds [36]. 3.3 How to View the Impact of 500 Billion Yuan of Local Government Debt Balance on the Bond Market? - In the absence of other incremental policy linkages, the impact of 50 billion yuan of special bonds on the bond market is limited. In 2022, the interest rate fluctuated upward due to a series of incremental policies, including fiscal, monetary, and structural policies [37][38]. - This 500 billion yuan of funds is likely to be issued in the form of new special bonds. Currently, the balance of general bonds is not large, and the use of this fund is more suitable for new special bonds [43]. 3.4 Bond Market Interest Rates First Rose and Then Fell - This week, the central bank's open - market operations changed from net investment to net withdrawal, but the liquidity in the market became looser. The bond market yield curve flattened as a whole, and the 10 - year Treasury bond yield first rose and then fell, rising 0.40bp to 1.82% [3][45]. - The reasons for the fluctuations in bond market interest rates include factors such as "TACO trading," good export performance, increased redemption pressure, market speculation on public fund fee reform, and the possible issuance of local government bonds in advance in 2026 [45]. 3.5 The Scale of Wealth Management Products Slightly Increased - As of October 12, the scale of existing wealth management products reached 30.9 trillion yuan, with a weekly increase of 120.652 billion yuan. From October 6 to October 12, the newly issued wealth management products totaled 14.68 billion yuan [55]. - In the second week of October, the scale of fixed - income products rebounded. By product type, the scale of cash - management products increased by 15.8 billion yuan, and the scale of fixed - income products increased by 41.7 billion yuan. By product risk level, the scale of first - level (low - risk) products increased by 5 billion yuan [59][60]. - The net - breaking rate of wealth management products decreased slightly last week. As of October 15, the average 7 - day annualized yield of 370 money funds was 1.05%, and the average 7 - day annualized yield of 265 cash - management products was 1.35% [60][62]. 3.6 Duration - This week, the duration of public funds decreased at first and then increased. From October 13 to October 17, the duration of public funds increased by 0.035 to 2.382 compared with October 10, and the weekly average was 2.364 [64]. - This week, the divergence of duration decreased, and the market's consensus expectation increased slightly. On October 17, the divergence of public fund duration decreased by 0.014 to 0.321 compared with October 10 [64].

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].