Report Summary 1. Investment Rating There is no specific industry investment rating provided in the report. 2. Core View The bond market is expected to continue its oscillating trend. Considering the weak fundamental situation, a slightly bullish stance is recommended for unilateral trading, with the suggestion to lightly position long on T contracts on dips. In terms of arbitrage, it is advised to stay on the sidelines for the short - term after closing the short position on the 30Y - 7Y term spread (TL - 3T) mid - week. Attention should be paid to potential cash - and - carry arbitrage opportunities in the next - quarter bond futures contracts [5][6]. 3. Summary by Directory First Part: Weekly Core Points Analysis and Strategy Recommendation - **Market Analysis**: This week, the bond futures market showed some divergence. Some market participants pre - speculated on the central bank's treasury bond trading information for this month, leading to relatively stronger performance in the short - to - medium - term. Meanwhile, foreign media reports on real - estate incremental policies suppressed long - term sentiment, with the TL contract declining more in the second half of the week. The actual progress, specific intensity of real - estate policies, and the source of fiscal subsidy funds are unknown, making it difficult to drive a trend - upward in yields. Market expectations for interest - rate cuts are weak, and capital prices continue to constrain the downward movement of yields [5]. - **Strategy Recommendation** - **Unilateral Trading**: Adopt a slightly bullish approach and lightly position long on T contracts on dips [6]. - **Arbitrage**: After closing the short position on the 30Y - 7Y term spread (TL - 3T) mid - week, stay on the sidelines in the short - term. For inter - delivery - month arbitrage, also enter a wait - and - see mode as the liquidity of the current - quarter contracts will gradually decline next week. Pay attention to potential cash - and - carry arbitrage opportunities in the next - quarter bond futures contracts, as their valuations are relatively high, mostly above 1.7% [5]. Second Part: Relevant Data Tracking - **Economic Data** - **EPMI**: In November, China's Strategic Emerging Industries Purchasing Managers' Index (EPMI) was 52.7, down 7.0 percentage points from the previous month. Although the decline was significant, it remained in the expansion range. EPMI and the official manufacturing PMI usually have high synchronicity in trends, but they diverged last month, indicating significant differences in the prosperity of different domestic industries. With the slowdown in the expansion of emerging industries in November, the recovery momentum of this month's PMI may still be weak [10]. - **Capital Market** - **Funding Conditions**: This week, affected by tax payments and a still - high net financing scale of government bonds, the market funding situation tightened first and then eased. As of Friday's close, DR001 and DR007 were 1.3209% and 1.4408% respectively. The overnight and 7 - day non - bank funding spreads were 6.68bp and 5.44bp respectively. The one - year certificate of deposit issuance rate of joint - stock banks slightly rose to around 1.65%. Next week, the net financing scale of government bonds will continue to decline, but approaching the end of the month, the funding situation will face some temporary disturbances. With the central bank's consistent supportive attitude, the upward range of market funding prices is expected to be relatively limited [12][16][17]. - **Term Spread**: Since Wednesday this week, the 30Y - 7Y term spread has widened again. On one hand, after the spread approached 40bp, there was a lack of substantial positive drivers, and the momentum for further compression was insufficient. Some funds pre - speculated on the central bank's treasury bond trading information for November and preferred to go long on medium - term treasury bonds. On the other hand, foreign media reported on Thursday that the policy level was considering providing mortgage subsidies to new home buyers nationwide in the future, which was more bearish for the long - term. If the mortgage subsidy policy is finally implemented, it will help balance the cost of home purchases and the rent - to - sale ratio for residents, and the probability of the central bank cutting interest rates will decrease accordingly, which is negative for the bond market. However, the details of relevant policies are unknown, so the bond market is not expected to over - price in advance [18][19][25]. - **Arbitrage Indicators** - **Inter - delivery - month Arbitrage**: In the past two weeks, the indicators for potential inter - delivery - month arbitrage opportunities during the roll - over period of the T contract triggered two short - term long - trading signals, but the indicator became neutral starting on Thursday, presumably related to the significant increase in long positions in the next - quarter T contract on that day. As next week is the last week before the delivery month, it is recommended to enter a wait - and - see mode for inter - delivery - month arbitrage [5][26][29]. - **Cash - and - carry Arbitrage**: Calculated based on the ChinaBond valuation and futures settlement prices, the implied repo rates (IRR) of the current - quarter contracts of TS, TF, T, and TL are 1.3226%, 1.0132%, 1.4099%, and 1.2732% respectively. The IRR of the next - quarter contracts of TS, TF, T, and TL are 1.6583%, 1.7361%, 1.7706%, and 1.7469% respectively, with relatively high valuations [34]. - **Roll - over Progress**: This week, the roll - over of the main contracts accelerated significantly. As of Friday's close, the roll - over progress of the TS, TF, T, and TL contracts was 69.2%, 63.2%, 63.7%, and 64.8% respectively [35].

Core Insights - The concentration of short positions in TS contracts is driven by significant entry of arbitrage funds, with expectations that the basis will initially widen slightly before stabilizing [1][3] - The current low interest rate environment, cautious sentiment in the bond market, and high Internal Rate of Return (IRR) are key factors influencing this phenomenon [1] Summary by Sections Historical Context - The concentration of short positions in TS contracts was observed from early 2024 to May 2024, driven by the entry of arbitrage funds and a surge in bullish sentiment [2] - The basis of TS contracts dropped to -0.24 yuan, while IRR peaked at 3.4%, attracting more arbitrage funds [2] Current Market Analysis - As of now, the short position held by CITIC Futures has peaked and is beginning to decline, indicating a potential for the basis to widen slightly before stabilizing [3] - The influx of arbitrage funds has led to a noticeable recovery in the current TS contract basis, although the incremental entry of these funds is expected to be limited [3]

Group 1 - The global industrial chain, monetary system, and asset analysis framework are undergoing reconstruction due to diminishing trust among countries, with gold potentially entering a long-term bull market driven by de-dollarization and ongoing central bank purchases [3] - Domestic economic demand remains to be boosted, and policies are expected to maintain a gradually positive tone [3] - Inflation is hovering at low levels, with the key to its rebound lying internally rather than externally, suggesting that policy efforts may become more aggressive in the second half of the year [5] Group 2 - May export growth has slowed, not due to previous over-shipments or temporary fluctuations, but rather due to the peak and subsequent decline of tariff expectations, indicating a resilient export sector despite a lower central tendency [9] - The high-interest rate environment caused by recent dollar credit discounts has led to a notable slowdown in private credit expansion in the U.S., creating a fragile balance that requires careful policy management to avoid potential debt crises [11] - The market for human-robot bearings is expected to see significant growth due to the development of humanoid robots, with domestic replacement opportunities becoming increasingly prominent [27] Group 3 - The recent trading heat in Chinese assets has increased, with a notable inflow of financing funds and new equity fund issuances exceeding 10 billion [13] - The Hong Kong stock market is emerging as a key battleground in the current bull market, driven by the scarcity of attractive assets and supportive domestic policies [16] - The expansion of ETFs is beneficial for credit bonds, with significant differences in duration and component concentration between Shanghai and Shenzhen market indices [20]

Group 1: Market Overview - The short-term bond market is expected to experience fluctuations, and unilateral operations are not recommended. However, if the liquidity does not continue to tighten, it is suggested to buy TS contracts on dips as valuations are relatively reasonable [1][4] - As of May 20, different maturity bond contracts showed continued divergence, with long-end contracts performing stronger and short-end contracts weaker. TL and T contracts both increased by 0.03%, while TF and TS contracts decreased by 0.04% and 0.03% respectively [1] Group 2: Economic Resilience - In April, the industrial added value for large-scale enterprises grew by 6.1% year-on-year, a decrease of 1.6 percentage points from the previous month, but still better than market expectations. The service production index also showed resilience with a 6.0% year-on-year growth [2] - Fixed asset investment and retail sales of consumer goods increased by 3.5% and 5.1% year-on-year respectively, indicating a strong demand side despite a slowdown in the real estate sector [2] - In April, new social financing reached 1.1591 trillion yuan, an increase of 1.2249 trillion yuan year-on-year, primarily supported by government bond financing [2] Group 3: Financial Data Insights - By the end of April, M2 money supply grew by 8.0% year-on-year, reflecting strong monetary support for the real economy, while M1 growth slowed to 1.5% year-on-year [2] - The decrease in household short-term and long-term loans by 401.9 billion yuan and 123.1 billion yuan respectively indicates a tightening in consumer credit and a slowdown in real estate sales [2] Group 4: Yield Curve Dynamics - The overall liquidity in May was more relaxed compared to April, with R001 and R007 rates dropping to 1.43% and 1.53%, respectively, creating a negative carry in the current bonds [4] - There is a divergence in market views regarding future liquidity, with concerns about potential tightening from the central bank amid high government bond issuance [4] - The ability of the yield curve to open up downward space will depend on whether liquidity continues to ease, which could lead to a decline in short-term yields [4]

Group 1: Report Information - Report Title: "TS Contract: Can It Still Be Used for Cash-and-Carry Arbitrage? - Interest Rate Weekly (Week 3 of May)" [1] - Report Date: May 19, 2025 [2] - Chief Analyst: Yan Ziqi, with a practice certificate number of S0010522030002 [2] - Research Assistant: Hong Ziyan, with a practice certificate number of S0010123060036 [2] Group 2: Industry Investment Rating - No industry investment rating is provided in the report. Group 3: Core Views - Since the implementation of reciprocal tariffs on April 3, the bond market's maturity yields have first decreased and then increased. Among treasury bond futures, the TL contract has been strong, while the TS/TF/T main contracts have declined [2]. - The weak performance of the TS contract is due to the previous large premium and the change in the expectation of loose monetary policy. The market's expectation of loose monetary policy changed significantly in Q1, and there are differences in the short - term expectation of loose monetary policy after the double - cut in May. The yield curve has flattened instead of steepening as expected [3]. - As of May 16, the basis of the TS main contract is - 0.07 yuan, and the IRR is 1.79%. The basis has significantly converged, and the IRR is close to the capital interest rate, so the cost - effectiveness of cash - and - carry arbitrage is insufficient [4]. - In the short term, the TS contract may still be in a premium state because of the continuous negative carry. The inversion between R001 and the 2 - year treasury bond maturity yield has decreased from about 60bp at the beginning of the year to 15bp on May 16, and the negative carry phenomenon of some varieties will continue [4]. - Considering that the tight capital situation in Q1 will not repeat, the short - term interest rate has a ceiling and the probability of a sharp decline is low. With the significant convergence of the basis, one can consider participating in the possible rise of the TS contract [4]. Group 4: Analyst and Research Assistant Introduction - Analyst Yan Ziqi is the assistant director of the Research Institute of Hua'an Securities and the chief analyst of fixed income. He has 8 years of experience in sell - side fixed income and equity research, and has won the second place in the 2024 Wind Gold Analyst and the best analyst in the 2023 Choice fixed income industry [12]. - Research Assistant Hong Ziyan is a master of financial engineering from the University of Southern California, covering macro - interest rates, institutional behavior, and treasury bond futures research [12].