Core Insights - The article emphasizes the critical role of banks in the bond market, highlighting that their asset allocation behavior significantly influences bond pricing and market trends, especially in the context of China's financial landscape [1][2] Group 1: Bank Asset Allocation and Bond Market Dynamics - Banks are the largest holders of bonds in China, with a projected holding scale of 91.23 trillion yuan by mid-2025, accounting for over 54% of the market [1] - The study aims to analyze the dynamic transmission mechanism of bank asset allocation on the bond market, moving beyond static perspectives to understand how allocation behavior evolves with economic cycles and regulatory constraints [2][4] Group 2: Static Relationship Between Bank Balance Sheets and Bond Markets - The asset allocation logic of banks is embedded within their balance sheet framework, where the liability side influences funding costs and stability, while the asset side reflects the trade-off between credit issuance and financial investments [3] - An increase in deposit growth and a decrease in funding costs lead banks to favor long-term government and local bonds, while weak deposit growth or rising interest rates push banks towards higher volatility, short-term trading assets [3] Group 3: Credit Issuance and Its Impact on Bond Markets - Empirical analysis from 2016 to 2025 indicates that household short-term loans have a leading effect on bond markets, with a notable increase in ten-year government bond yields observed within four months following an increase in loan growth [5][6] - In contrast, corporate loans exhibit less impact on bond yields, with their influence being more short-lived compared to household loans [6] Group 4: Heterogeneity in Bond Investment Behavior - The study categorizes bond investments into three types based on accounting methods and finds that different types of banks exhibit varying impacts on government bond yields [7] - State-owned banks tend to stabilize the market through their bond investments, while smaller banks may increase market volatility due to their trading strategies and yield preferences [7] Group 5: Conclusions and Policy Implications - The research reveals that credit issuance is pro-cyclical while bond investment is counter-cyclical, indicating a macro-regulatory function of bank asset allocation [8] - Recommendations include optimizing bond asset allocation, enhancing internal fund transfer pricing mechanisms, and strengthening risk management frameworks, particularly for smaller banks [8][9]