Group 1 - The bond market in December remained in a volatile state, influenced by institutional behavior and concerns over potential risks in Q1, including government bond issuance and credit expansion impacts on bank credit [2][17] - The supply-demand imbalance for ultra-long bonds is a significant concern, with the issuance of super-long government bonds increasing substantially in recent years, particularly in 2025 [3][21] - The central economic work conference indicated that the fiscal deficit rate may remain at 4% in 2026, with only a slight expansion in government bond supply compared to 2025, despite concerns about the capacity of institutions to absorb large-scale local bond issuances [4][22] Group 2 - A total of 20 regions have announced their Q1 issuance plans, amounting to 1.688 trillion yuan, which is higher than the actual issuance in Q1 2025, indicating a more optimistic outlook for 2026 [4][23] - The anticipated net financing for government bonds in January, February, and March 2026 is estimated at 1.29 trillion, 0.86 trillion, and 1.25 trillion yuan respectively, totaling approximately 3.4 trillion yuan for the quarter, which is lower than the 4.1 trillion yuan in the same period of 2025 [35][32] - The central bank's monetary policy has shifted towards maintaining liquidity support, with a significant probability of a reserve requirement ratio cut in January, which could alleviate uncertainties regarding bank liabilities [6][60] Group 3 - The market is currently facing uncertainty regarding the impact of new public fund regulations, which aim to reshape the industry ecosystem without causing significant short-term disruptions [9][10] - Despite the ongoing concerns about credit expansion and its effects on bank liabilities, the central bank's recent statements suggest a more cautious approach to credit growth, potentially leading to a more stable liquidity environment [43][57] - The bond market may see opportunities for long-term bonds if extreme market fears do not materialize, with a focus on 3-5 year government bonds and perpetual bonds [10][8]

Investment Rating - The report does not explicitly provide an investment rating for the industry or specific assets. Core Insights - The report indicates a less urgent need for substantial policy easing in the near term, with June PMI surveys showing resilient economic momentum and Q2 real GDP growth tracking slightly above 5% [5] - The report suggests a gradual descent of the USD/CNY exchange rate, with a forecast of 6.90 for the USD/CNY spot in 12 months, implying limited total returns for long CNY positions against the USD [5] - The rates market is expected to continue short-term consolidation, with interest rates in China drifting lower over the medium term due to resilient economic growth and limited appetite for significant easing [6] Valuations and Policy Stance - The USD/CNY spot fell further in June, while the CNY depreciated modestly against the CFETS basket, indicating a shift in valuations [10] - The countercyclical factor widened in June, suggesting an appreciation bias in the USD/CNY fixing [17] Technicals - The carry-to-volatility ratio for USD/CNH and EUR/CNH remained largely unchanged in June, indicating stable market conditions [20] - Momentum to buy USD or EUR and sell CNH remained largely unchanged, reflecting consistent trading patterns [21] Fundamentals - China's trade balance rose in May, driven by a higher goods trade surplus, indicating strong export performance [32] - Long-term cash bond yields and NDIRS rates remained largely stable in June, suggesting a balanced outlook for bond markets [38] - The consensus forecast for CPI inflation edged down in June, while the forecast for real GDP growth edged up, reflecting a mixed economic outlook [56] Liquidity and Leverage - The PBOC injected liquidity into the interbank market in June primarily through pledged reverse repos, indicating active liquidity management [58] - Repo rates declined in early to mid-June before rising at the quarter-end due to seasonal liquidity demand, reflecting fluctuations in funding conditions [61] Bond Supply and Demand - Net issuance of central government bonds was around RMB 706 billion in June 2025, with the central government utilizing 51% of the annual issuance quota [69] - Local government general bond net issuance was around RMB 94 billion in June 2025, with local governments utilizing 56% of their general bond issuance quota [72]