1. Report Industry Investment Rating No information about the industry investment rating is provided in the report. 2. Core View of the Report In 2026, the investment strategy for bank Tier 2 and perpetual bonds should focus on trading, with limited value in credit quality downgrading. The demand side of bank Tier 2 and perpetual bonds may face pressure, mainly with structural impacts, while the net supply is likely to remain at a low level, and small and medium - sized banks may continue to increase issuance. The credit spread of medium - and long - term AAA - rated Tier 2 and perpetual bonds still has an upper limit and a lower limit, but trading difficulties have increased, and short - term downgrading of these bonds may not yield significant excess returns [2][7][68]. 3. Summary by Relevant Catalogs 3.1 2025, Bank Tier 2 and Perpetual Bonds: Primary Market Contraction and Secondary Market Differentiation - **Net financing contraction**: In 2025, the net financing of bank Tier 2 and perpetual bonds decreased year - on - year. The total issuance was 1.58 trillion yuan, with a net financing of 432.7 billion yuan, a year - on - year decrease of 86.4 billion yuan. The decrease was mainly due to the reduced supply from joint - stock and small and medium - sized banks [12]. - **Differentiated performance**: The yield of bank Tier 2 and perpetual bonds showed an "M" - shaped oscillatory trend in 2025. Short - term and low - grade bonds performed strongly, with significant narrowing of credit spreads, while long - term bonds underperformed [31]. 3.2 2025, Changes in Institutional Behavior - **More active trading**: In 2025, the trading of bank Tier 2 and perpetual bonds became more active. The average daily trading volume increased significantly compared to the previous year, and the proportion of trading volume in all credit bonds rose from 31% in 2024 to 39% [1]. - **Increased allocation by major non - bank institutions**: In 2025, funds, wealth management products, insurance, and other asset management products all net - bought other types of bonds (mainly bank Tier 2 and perpetual bonds) in the secondary market. Among them, funds, wealth management products, and insurance increased their allocation efforts year - on - year [39]. 3.3 2026, Outlook on the Supply and Demand of Bank Tier 2 and Perpetual Bonds - **Demand side pressure with structural impacts**: Under the new regulations on fund sales fees, short - term and medium - short - term bond funds may face redemption pressure, leading to selling pressure on Tier 2 and perpetual bonds. Wealth management products are undergoing rectification of net - value smoothing methods, reducing their positions in these bonds. The full implementation of the new insurance I9 accounting standard in 2026 may suppress the demand for long - term bonds [2][3]. - **Low net supply, potential increase from small and medium - sized banks**: From 2024 - 2025, the net financing of state - owned banks' Tier 2 and perpetual bonds was significantly reduced and may remain low in the future. Although the capital adequacy ratios of joint - stock, city, and rural commercial banks are above the regulatory requirements, they have shown a downward trend this year. If interest rates remain low next year, small and medium - sized banks may increase issuance [63]. 3.4 2026, Focus on Trading, Limited Value in Downgrading - **Credit spread characteristics**: The credit spread of medium - and long - term AAA - rated Tier 2 and perpetual bonds still has an upper limit and a lower limit. In 2025, the credit spread of 3 - year bonds had a slightly lower central value and a compressed fluctuation range; the central values of 5 - year and 10 - year bonds increased, with the 5 - year bond's fluctuation range narrowing and the 10 - year bond's upper and lower limits rising [68][69][73]. - **Trading difficulties**: The yield of Tier 2 and perpetual bonds has been oscillating in a narrow range at a low level, and the "amplification of interest rate fluctuations" attribute has weakened year - on - year, increasing trading difficulties. In 2026, more precise timing is needed to enhance returns [81][84]. - **Low downgrading value**: The credit risk of Tier 2 and perpetual bonds is controllable, but the cost - effectiveness of short - term and low - grade bonds has decreased significantly. In the future, short - term downgrading may not yield significant excess returns [92][95].