Monetary Policy and Bond Market - The People's Bank of China (PBOC) implemented a long-awaited easing policy by lowering the reserve requirement ratio by 50 basis points and reducing the 7-day reverse repurchase rate by 10 basis points to 1.4% [1][7] - Following the announcement, the yield curve steepened due to market reactions, with the 2-year and 10-year Chinese government bond yield spread narrowing to 16 basis points, close to a ten-year low [10][1] - Bank of America anticipates further steepening of the yield curve due to increased supply of long-term bonds from special government bonds and favorable liquidity conditions, with the possibility of the PBOC restarting bond purchase operations [1][10] Foreign Exchange and Capital Flows - The net foreign exchange settlement balance for banks improved from -6.7 billion USD in February to 0.1 million USD in March, indicating a balanced supply and demand for USD [2][30] - The comprehensive net foreign exchange settlement amount reached 8.4 billion USD in March, marking the first positive value since October 2024 [4][33] - In March, the merchandise trade net foreign exchange settlement surplus increased from 16.7 billion USD in February to 25.5 billion USD, while the net foreign exchange settlement deficits for services and income remained stable [37][34] Bond Market Dynamics - The average rates for DR007 and R007 in April were 1.82% and 1.9%, respectively, indicating a further easing of the funding environment [7] - The PBOC has not conducted government bond transactions in the secondary market for four consecutive months, but is expected to engage in net bond purchases in the coming months to align with a large-scale bond issuance plan [16][19] - The net supply of government bonds decreased significantly in April compared to previous months, with a total net supply of approximately 4.85 trillion RMB, which is 35% of the annual issuance estimate [21][19]

Core Viewpoint - The recent decline in the DR001 (overnight pledged repo weighted average rate) to 1.5294% is a response to the central bank's interest rate cut and broader monetary policy measures, indicating a modest adjustment in the money market rates compared to the policy rate changes [1][2][4]. Group 1: Monetary Market Rates - As of May 8, the DR001 weighted average rate decreased by 0.13 percentage points from the previous day, while the closing rate fell by 0.07 percentage points [4]. - The DR007 weighted average rate also saw a decline, dropping approximately 0.07 percentage points to 1.6112% on May 8, compared to 1.6802% on May 7 [4][5]. - Monthly data shows that the DR007 weighted average rate was 1.7594% in April, highlighting a significant downward trend following the policy rate adjustments [4]. Group 2: Government Bond Yields - Government bond yields across various maturities have also decreased, with the 10-year bond yield falling by 0.0087 percentage points to 1.6331% on May 8 [5]. - The yields for 3-month bonds decreased by 0.0335 percentage points, reflecting a general downward trend in bond yields following the central bank's announcement [5]. Group 3: Market Reactions and Expectations - Analysts suggest that the stable market response indicates that the central bank's policies have effectively stabilized market expectations, despite the potential for the 10-year bond yield to reach 1.5% within the year [6]. - The central bank's approach aims to guide market rates in alignment with policy rates, ensuring that the DR007 remains close to the 7-day reverse repo rate [6][8]. - There is an expectation that the DR007 will eventually return to levels near the OMO rate, although this will not happen immediately, as the central bank employs a gradual strategy to manage interest rates [8].

Report Industry Investment Rating - Not provided in the content Core View of the Report - The current bond yield is in a state where the upward space is relatively small and the downward probability is relatively large. Investors can be more optimistic than in the first quarter of this year [1][9] - In the near future, DR007 will steadily fall back to near the OMO rate. The "positive deviation" of DR007 from the 7D OMO rate since the first quarter of this year will return to normal, and relevant events in April accelerated this process [1][11][17] - The regulator should adopt a "soft landing" and "gradual" strategy in guiding the downward movement of the capital interest rate, which helps investors form stable expectations for monetary policy [4][21] Summary by Relevant Catalog 1. Wait for DR007 to Return to OMO - On April 30, the yields of 10Y and 30Y treasury bonds had decreased by 3.6bp and 10.4bp respectively compared to April 25, which was consistent with the previous judgment [1][9] - Since 2018, DR007 has mostly run smoothly around the 7D OMO rate. In extreme cases such as 2020 and 2022, there were "negative deviations", and in the first quarter of this year, there was a "positive deviation" [2][14] - Whether it is a "positive deviation" or a "negative deviation", it is only temporary. The "negative deviation" in 2020 and 2022 only lasted for a few months and then returned to normal [3][17] - As the liquidity of the banking system becomes more abundant, the lending rate of large banks will also decline. The CD rate still has room to decline, and the decline of DR007 can guide the reduction of CD and other rates [3][21]