1. Report Industry Investment Rating - No industry investment rating is provided in the report. 2. Core View of the Report - The bond market is expected to gradually return to the fundamentals and asset shortage situation through incremental restoration in a volatile manner. The 10-year Treasury bond above 1.8% still has allocation value, and the long-term bond yield is expected to return to around the level before this round of adjustment by the end of the year, with the 10-year Treasury bond likely to recover to around 1.6% - 1.65% [6][21]. 3. Summary by Relevant Catalogs 3.1 Bond Market Performance This Week - The bond market rose first and then fell this week, remaining volatile overall. The yields of 10-year and 30-year Treasury bonds increased by 1.1bps and 2.1bps respectively to 1.80% and 2.10%. The yields of certificates of deposit and credit bonds remained stable or declined slightly, with the 1-year AAA certificate of deposit yield rising slightly by 0.5bps to 1.68%, and the yields of 3-year and 5-year AAA - secondary capital bonds falling by 2.6bps and 1.5bps respectively to 2.00% and 2.13% [1][9]. 3.2 Deviation of the Bond Market from Fundamentals and Capital - **Deviation from fundamentals**: The bond market trend is inconsistent with the fundamentals. The terminal demand calculated by export, infrastructure, and real estate investment decreased from 5.2% in April to 0.5% in August, and the year-on-year growth rate of industrial added value decreased from 6.8% in June to 5.2% in August. The manufacturing PMI has been below 49.5%, indicating relatively low economic prosperity, which is inconsistent with the overall upward trend of long-term bond yields in the past two months [2][10]. - **Deviation from capital**: The long-term bond also deviates significantly from the capital trend. The 20-day moving average of R007 has been declining since late February, from around 2.2% to around 1.5% currently, while the long-term bond yield has been rising in the past two months, and the spread between the two has reached over 30bps, a relatively high level in the past two years [2][10]. 3.3 Historical Situation of Interest Rate Deviation - Historically, it is rare for interest rates to deviate from both capital and fundamentals simultaneously. Previously, interest rate adjustments were usually accompanied by improvements in fundamentals or tightening of capital, and most of the time, changes in fundamentals and capital preceded interest rate adjustments. For example, in March 2016, the manufacturing PMI rose above the boom - bust line, and the interest rate recovery occurred in the fourth quarter of 2016 [3][13]. 3.4 Logic of Interest Rate Change - It is more logical for changes in capital or fundamentals to lead long - term interest rates. Interest rate is the financing cost. For the real economy, interest rates can only achieve a trend recovery when demand continues to rise. If the fundamentals are still weak and financing demand is insufficient, a premature rise in interest rates will suppress the fundamentals [4][18]. 3.5 Special Situation of Current Deviation - The current simultaneous deviation of long - term bonds from fundamentals and capital has its particularity. Part of the reason for the relative weakness of long - term bonds is the over - rise from the end of last year to the beginning of this year, and part of the triggering factor is the increase in risk appetite brought about by the rise of the stock market. However, from multiple perspectives such as the downward speed of broad - spectrum interest rates, interest rate cut expectations, curve slope, and the interpretability of fundamentals, the previous over - rise may have been digested, and subsequent interest rates are expected to return to the fundamentals and asset shortage situation [4][18]. 3.6 Situation in the Fourth Quarter - **Increasing possibility of asset shortage**: Asset supply is expected to further decline. If the net financing of government bonds in September is 1.3 trillion, the net financing of government bonds in the first nine months of this year is 11.6 trillion. According to the budget, the net financing in the fourth quarter is about 2.2 trillion. Even if 1 trillion of refinancing bonds for next year are advanced to this year, the net financing of government bonds in the fourth quarter will still be about 0.7 trillion less than last year. At the same time, the issuance of refinancing bonds may further increase the replacement of assets such as credit, and overall asset supply will further decline. However, fiscal deposits will continue to decrease year - on - year, and the central bank's bond trading will also increase capital supply, so the asset shortage may intensify [5][19]. - **Increasing possibility of fundamental pressure**: From the perspective of industrial product prices, the production material price index of the Ministry of Commerce has been falling since early August, and the PPI month - on - month in September may turn negative again, indicating that the fundamental pressure may increase [5][19]. 3.7 Bond Market Outlook and Investment Suggestions - **Bond market outlook**: The decline in the real return rate determines that the downward trend of broad - spectrum interest rates such as loan interest rates has not changed. The over - rise of interest rates at the beginning of the year has gradually been digested. Therefore, the current interest rate adjustment space is limited, and the bond market will gradually return to the fundamentals and asset shortage situation, but this return may be achieved through incremental restoration in a volatile manner [6][21]. - **Investment suggestions**: A dumbbell - shaped operation is recommended, that is, short - term credit/certificates of deposit + long - term interest rates. High - selling and low - buying band operations can be carried out on long - term interest rate positions [6][21].

Fixed Income Commentary - The recent decline in funding prices has not led to a decrease in certificate of deposit (CD) rates, resulting in a widening spread between the two. As of September 5, the R007 (20DMA) rate was 1.50%, down 15 basis points from the end of Q2, while the 1-year AAA CD rate rose slightly to 1.665%, an increase of 3.5 basis points from the end of Q2. The spread between the 1-year CD and R007 has expanded significantly to 16.4 basis points, compared to a June average of 4.9 basis points, indicating a high level not seen in nearly two years [1][8][9]. Currency and Foreign Capital Flow - During the period of anticipated RMB depreciation, a high forward exchange rate premium attracted foreign capital inflow, leading to significant accumulation of CDs. From September 2023 to August 2024, the RMB is expected to face depreciation pressure, with the forward exchange rate premium remaining high at around 3%-4%. Foreign investors have been purchasing domestic 1-year CDs and locking in forward exchange rates, achieving a combined yield of 5%-7%, which is higher than the yield on 1-year US Treasury bonds. The difference between the forward exchange rate premium and the 1-year AAA CD yield compared to the 1-year US Treasury yield has remained positive, mostly around 1 percentage point [2][11][13]. Impact of RMB Appreciation - As the RMB shifts from depreciation pressure to appreciation pressure, the forward premium has decreased, leading to capital outflows from the bond market, particularly in CDs. Since May, the RMB has appreciated against the USD, with the 1-year forward exchange rate premium dropping to around 2%. This decline means that even with investments in domestic bonds, the overall yield is approximately 4%, comparable to the yield on 1-year US Treasury bonds. From May to July, foreign investors reduced their holdings in domestic bonds by 515.5 billion RMB, with 313.8 billion RMB attributed to CDs [3][16][21]. Foreign Capital Reduction and CD Rates - The reduction in foreign holdings of CDs has contributed to the slower decline in CD rates, resulting in a widening spread between CDs and funding rates. From April to July, foreign investors reduced their monthly holdings of CDs by an average of 104.6 billion RMB. Given that the average net financing for CDs this year has only been 1.885 billion RMB per month, the reduction in foreign holdings has had a notable impact on CD rates, potentially leading to a slower decline in rates during periods of falling funding prices [17][22].

Group 1: Report Industry Investment Rating - Not provided in the content Group 2: Core Viewpoints of the Report - The bond market continued its recovery this week, with most interest rates declining to varying degrees, especially short - term and credit interest rates. The short - term interest rate's further downward breakthrough momentum is weak, and the bond market may experience short - term phased oscillations, with the subsequent interest rate more likely to break through downward [1][4] - Although other markets and some policies have short - term impacts on the bond market, the continuous loosening of funds provides protection, and the overall pattern of asset shortage in the bond market remains unchanged [2][3][4] Group 3: Summary by Related Content Bond Market Current Situation - This week, the bond market continued its recovery, with short - term and credit interest rates declining more significantly. The 1 - year AAA certificate of deposit rate dropped 1.8bps to 1.62%, and the 1 - year and 5 - year AAA - secondary capital bonds decreased by 2.7bps and 0.7bps respectively. The 10 - year Treasury bond rate fell 1.7bps to 1.69%, while the 30 - year Treasury bond rate rose slightly by 1.1bps to 1.96%. The 10 - year Treasury bond rate has recovered most of its decline from the impact of the stock and commodity markets [1][8] Factors Restraining the Downward Breakthrough of Interest Rates - Other markets still suppress the bond market sentiment. The recent strong performance of the stock market affects the bond market sentiment, especially long - term bonds. The 30 - year Treasury bond has been weak recently due to this factor [2][9] - Institutional caution and the implementation of some growth - stabilizing policies will short - term constrain the bullish forces. In the second quarter of this year, the duration of funds increased significantly, and high positions made institutions operate more cautiously. The relaxation of purchase restrictions in Beijing may also affect the downward force of interest rates [2][11] Factors Protecting the Bond Market - The continuous loosening of funds provides market protection, making it difficult for interest rates to rise significantly. The overnight interest rate is around 1.3%, and R007 is around 1.4%, protecting the overall market. During the market recovery since July 29, short - term interest rates have declined more significantly [3][11] - In the future, funds will remain loose. Financing demand may continue to slow down, government bond supply will decrease, and fund supply is sufficient. The central bank has stated that it will maintain ample liquidity [3][12] Future Outlook for the Bond Market - The bond market may experience short - term phased oscillations. As the fundamentals and asset supply - demand change, the interest rate is more likely to break through downward. From the fundamental perspective, low interest rates are needed to boost domestic demand, and from the asset supply - demand perspective, the decrease in asset supply and continuous loosening of funds will increase the pressure of asset shortage [4][13] - After the phased cooling of the stock and commodity markets, the 10 - year and 30 - year Treasury bonds may oscillate when approaching the pre - adjustment levels of 1.65% and 1.85%. Subsequently, as the fundamentals change and the asset shortage evolves, the interest rate may break through downward, more likely near or in the fourth quarter [4][18]

Group 1: Report Industry Investment Rating - Not provided in the content Group 2: Core Viewpoints of the Report - The bond market is still strengthening, and the easing of funds is expected to create a short - to - long market trend in July. It is recommended to maintain a duration above the medium level, and the dumbbell strategy is more advantageous. The report believes that the 10 - year Treasury bond yield is expected to fall to 1.4% - 1.5% [6][23] - With the current capital price, short - term interest rates such as certificates of deposit still have room to decline further, and after the short - term interest rates decline, the long - term space will also be opened up [5][18] - The compression of spreads is limited, and to open up the interest rate space, it is necessary to break through the key interest rates to open up the downward space of the overall curve [3][15] Group 3: Summary by Related Content Bond Market Performance - This week, the bond market continued to strengthen, with more obvious compression of short - term and credit spreads. After the quarter - end, although the central bank significantly withdrew funds, the funds were still loose as expected. Short - term interest rates continued to decline, while the key long - term interest rates remained relatively stable [1][9] Spread Compression - After the key - term interest rates dropped to near the key positions, the market mainly compressed various spreads, including the spreads between key and non - key terms of interest - rate bonds, between non - active and active bonds, and between different bond varieties [2][10] Spread Compression Limit - The compression of spreads is limited. As spreads decline, the risk of non - active varieties increases, which will prompt funds to flow back to active varieties. To further lower interest rates, key terms and varieties need to break through key positions [3][15] Fund Situation - The current loose fund situation is expected to continue. On one hand, the demand for funds has slowed down; on the other hand, the central bank's space for withdrawing funds may decrease. Additionally, the release of previously accumulated fiscal deposits will also contribute to the continued loosening of funds [4][17] Interest Rate Trend - If the capital price remains at the current level, short - term interest rates such as certificates of deposit have room to decline further. After the short - term interest rates decline, the long - term interest rate space will also be opened up, driving the key interest rates to break through key positions and bringing down the overall curve [5][18]

1. Report Industry Investment Rating No relevant content provided. 2. Core View of the Report - The current loose funds have not been fully reflected in the bond market. The bond market is expected to develop from short - term to long - term, with the curve likely to first show a bullish steepening and then a bullish flattening. The overall interest rate downward trend remains unchanged [3][5][24] 3. Summary by Related Content Market Performance - This week, funds were loose, and the short - end trend was significantly stronger than the long - end. After the holiday, the R001 and R007 dropped to 1.52% and 1.58% respectively, driving the short - term interest rates to decline significantly. The 1 - year AAA certificate of deposit (CD) dropped 7.5bps to 1.66% this week. Short - term interest rates and short - term credit also decreased significantly. The 10 - year and 30 - year treasury bonds rose slightly by 1.1bps and 1.9bps to 1.64% and 1.84% respectively [1][8] Reasons for Loose Funds - Seasonally, funds are loose in the first and middle of May. The central bank announced a 0.5 - percentage - point reserve requirement ratio cut this week, releasing about 1 trillion yuan in liquidity. Even if considering the maturity of MLF (125 billion yuan) and repurchase (90 billion yuan) this month and assuming a half - volume continuation, the net capital injection from the reserve requirement ratio cut and repurchase is still over 50 billion yuan. Calculated with the March money multiplier of 8.65, it can support about 4.3 trillion yuan in financing demand. Since the social financing scale in May last year was only 2 trillion yuan, the current loose funds situation will remain until before the end - of - quarter impact [2][9] Impact on the Bond Market Quantity Perspective - As the capital price drops, the spreads between CDs, short - term credit, etc., and funds have turned positive, meaning that leveraging can effectively increase returns. Although the current leverage level has rebounded, it is not significantly higher than previous years. The daily trading volume of inter - bank pledged repurchase on May 9 was about 6.5 trillion yuan, basically the same as the same period last year [3][12] Price Perspective - Short - term interest rates still have room to decline further. The 1 - year CD is expected to drop to around 1.6%. Based on the average spread of about 9.5bps between the 1 - year AAA CD and overnight funds in the past year, if the overnight interest rate stabilizes at around 1.5% and the R007 at around 1.6%, the 1 - year AAA CD rate may be around 1.6%. Currently, the CD rate has dropped to 1.66% [3][13] Short - Term Bond Interest Rates - The 1 - year treasury bond and 1 - year AAA medium - term note are expected to drop to around 1.2% and 1.6% respectively. The spread between the 1 - year AAA CD and the 1 - year treasury bond has narrowed to 24bps, the lowest since 2023. If the spread returns to the average level of about 42bps since 2023, a 1.6% CD rate may correspond to a 1.2% 1 - year treasury bond rate. Credit bonds and CD rates are basically the same, so as the CD rate drops to around 1.6%, the same - maturity high - grade credit bonds are also expected to reach the corresponding level [4][19] Long - Term Bond Interest Rates - The decline in short - term interest rates will protect long - term interest rates and promote a significant recovery in the credit bond curve slope. If the 2 - year treasury bond drops to around 1.2%, combined with the average spread of 44bps between the 10 - year and 2 - year treasury bonds since 2023, the corresponding 10 - year treasury bond will be around 1.64%, indicating limited adjustment pressure on long - term bonds. The decline in short - term bond interest rates will bring better investment opportunities for 3 - 5 - year interest - rate bonds and 3 - 5 - year secondary perpetual bonds. The spread between the 5 - year and 1 - year AAA - secondary capital bonds has rebounded to around 20bps, more than 20bps higher than the low point in February, and the long - end allocation value of secondary perpetual bonds is emerging [4][21] Market Outlook - The bond market is expected to develop from short - term to long - term. The loose funds protect the short - end. The current CD rate is higher than the capital price, allowing leveraging to allocate CDs to increase returns. The spread between CDs and short - term treasury bonds has reached a low in recent years, making short - term treasury bonds more cost - effective than CDs for bank self - operated funds. The market leverage is also expected to gradually recover. The decline in short - term interest rates will increase the term spread, protect long - term interest rates, and enhance the allocation cost - effectiveness of 3 - 5 - year interest - rate bonds and credit bonds, gradually realizing the trend of the bond market first showing a bullish steepening and then a bullish flattening [5][24]