1. Report Industry Investment Rating No information provided in the given content. 2. Core View of the Report - After the Spring Festival, the bond market has been oscillating within a narrow range. The short - end carry trade strategy has high stability, while the long - end is expected to continue the oscillating situation. When the long - bond volatility increases and lacks profit - making effects, the overall risk preference in the bond market declines, and investors turn to the leveraged carry trade strategy. The current decline in capital volatility provides a stable space for the carry trade strategy. For the long - end, attention should be paid to how far the allocation - driven market can go and the rhythm of interest rate cuts and reserve requirement ratio cuts. It is expected that there will be one interest rate cut and one reserve requirement ratio cut this year, and non - bank deposit rates are also expected to be further reduced [1][7]. 3. Summary According to Related Catalogs 3.1 Spring Festival Bond Market Overall Oscillation - After the Spring Festival, the bond market has been oscillating. Affected by factors such as month - end capital fluctuations, real - estate policy expectations, profit - taking sentiment of trading desks, and geopolitical conflict risk - aversion sentiment, the market has entered a stage of long - short game. From February 24th to March 5th, the long - end oscillated within a narrow range, while the short - end oscillated downward due to looser capital. The 10 - year Treasury bond yield fluctuated between 1.78% - 1.83%, the 30 - year Treasury bond yield fluctuated between 2.24% - 2.29%, and the 1 - year Treasury bond yield dropped from 1.31% before the festival to 1.29%. The 30Y - 10Y Treasury bond spread widened by 5.1bps to 50bps. During the current Two Sessions policy window period, there is strong wait - and - see sentiment, and it is difficult for the bond market to show a trend in the short term [11]. 3.2 High Stability of Short - End Carry Trade Strategy - The bond market is an institutional market with similar behaviors. There is usually only one strategy with the most obvious profit - making effect in a specific period, such as extending duration, leveraged carry trade, and the previous urban investment extreme sinking strategy. Historically, the most profitable strategies often reverse after becoming highly crowded. For example, the 1.5 trillion special refinancing bonds in 2023 and the 10 trillion debt - resolution plan in 2024 gave rise to the urban investment coupon sinking strategy, and the interest - rate duration - extension strategy starting in Q3 2024 also had obvious profit - making effects [14]. - The stability of the leveraged carry trade strategy depends on the comparison with other strategies. When long - bond volatility increases and lacks profit - making effects, investors may face capital losses when extending duration. At this time, the risk preference in the bond market declines, and the sentiment of gambling on capital gains fades. They choose the leveraged carry trade strategy instead. Since the Spring Festival, long - bonds, especially the 30 - year Treasury bonds, have been oscillating, and the trading enthusiasm of public funds for 30 - year bonds has declined. The current spread between AAA - rated 3 - year medium - term notes and R001 is between 40 - 50bps. Considering the lack of effective strategies in the pure - bond market and the relatively low inter - bank leverage ratio, the leveraged carry trade strategy may continue [7][19]. - The current decline in capital volatility provides a stable space for the carry trade strategy. In the long run, it is difficult for the capital situation to experience significant fluctuations and tightening similar to that in Q1 2025. The current monetary policy is gradually shifting from a liquidity - shortage framework to a neutral or surplus one, and the overnight capital volatility has significantly decreased [7][20]. 3.3 Long - End Expected to Continue Oscillating - Since January this year, the long - bond market has been mainly driven by allocation desks. After the significant adjustment of the bond market last year, public funds' long - bond positions are not large. Although securities firms' proprietary trading desks have tried to short TL and sell bonds intraday this year, they have not driven a trend - like adjustment in ultra - long bonds. It is expected that long - bonds will continue to oscillate this year. Attention should be paid to how far the allocation - driven market can go and the rhythm of interest rate cuts and reserve requirement ratio cuts [7][28]. - Banks are important participants in the allocation desks this year. On the one hand, deposits have a better - than - expected "good start", and on the other hand, the loan growth rate has been declining, and the gap between deposit and loan growth rates has widened, leading to more funds flowing into the bond market. It is believed that "deposit migration" is unlikely to occur in the long term, and bank deposit liabilities are relatively stable. The credit scale under the national social financing caliber has been shrinking in recent years, and it is expected to drop to 15 trillion in 2026. If the credit "good start" increases less year - on - year, large banks may increase lending to smooth the annual credit growth rate, and its impact on the bond allocation desks needs to be noted [7][29]. - Under the neutral assumption, it is expected that there will be one interest rate cut and one reserve requirement ratio cut this year. It is expected that the 7 - day OMO rate will be cut to 1.3% this year, and non - bank deposit rates are also expected to be further reduced, which will drive down long - bond interest rates. However, attention should be paid to the possible callback of long - bonds after the interest - rate cut market is over. It is still recommended to pay attention to the fiscal bond - issuance rhythm and the inflation theme for the long - end [7][30].

Group 1 - The report highlights a deepening global credit risk differentiation, with France's sovereign rating downgraded to A+ and increasing default pressure on US corporations, suggesting a focus on extending duration and upgrading ratings in investment strategies [1][6][29] - The global bond market is driven by three main themes: monetary policy outlook, structural changes in sovereign debt, and international financial system reforms [6][8] - The report indicates that emerging market bonds are showing significant differentiation, with major markets enhancing resilience through dollar and local currency issuance, while frontier markets face sustainability pressures [6][8] Group 2 - The report notes that the US Treasury yield curve has shifted to a bull steepening shape, with the 10-year yield dropping to 4.011% and the 2-year yield declining even more significantly [8][9] - European sovereign bond yields have also seen substantial declines, with the UK 10-year yield plummeting by 25.83 basis points and Germany's 10-year yield falling by 14 basis points [9][10] - The credit market is showing a clear differentiation, with investment-grade corporate bonds performing strongly and high-yield bonds under pressure, as evidenced by the G-spread narrowing for investment-grade bonds while widening for high-yield bonds [11][28] Group 3 - The report emphasizes the need for defensive and structural opportunities in current investment strategies, recommending a moderate extension of duration and an overweight in investment-grade bonds [6][11] - The report suggests increasing allocations to emerging market dollar bonds while avoiding frontier market foreign currency debt, highlighting the resilience of major emerging markets [6][11] - The report also points out the narrowing of the offshore RMB bond yield spread, indicating improved liquidity and demand for RMB assets [15][24]

Core Viewpoint - The credit bonds, particularly urban investment bonds, are showing strong performance despite the weak performance of interest rate bonds, with significant opportunities for investment in the 3 to 5-year maturity range [1][2]. Group 1: Credit Bond Performance - Since May, credit bonds have continued to strengthen, with yields declining and credit spreads narrowing, particularly in urban investment bonds [2]. - The yield on urban investment bonds has decreased by 1 to 9 basis points, with credit spreads compressing by 1 to 8 basis points during the week of May 19 to May 23 [2]. - The weighted average yield for 3 to 5-year urban investment bonds is 2.43%, which is 33 basis points higher than that of industrial bonds of the same maturity [2]. Group 2: Supply and Demand Dynamics - The favorable supply and demand environment is a key factor supporting the strong performance of urban investment bonds [4]. - Demand for credit bonds is increasing, with the TKN (total known net) proportion for urban investment bonds reaching 77%, and the proportion of undervalued bonds rising from 74% to 81% [4]. - The net financing scale for urban investment bonds is expected to be negative for three consecutive months, which is historically rare [4]. Group 3: Investment Strategies - Investment institutions are advised to focus on urban investment bonds with yields above 2.3%, particularly in provinces like Shandong, Jiangsu, Sichuan, and others [6][7]. - Specific cities such as Qingdao, Chengdu, and Xi'an have a high scale of urban investment bonds with yields above 2.3%, making them attractive for investment [6]. - The strategy should include a mix of long-term and short-term bonds, with a focus on high-grade credit bonds for a duration of 5 years and urban investment bonds for 2 to 3 years [7].