China Rates 2025_Just how low can bond yields go_

Summary of Key Points from the Conference Call Industry Overview - The focus of the conference call is on the China government bonds (CGBs) and the broader fixed income market in China for 2025 Core Insights and Arguments - Performance of CGBs: CGBs delivered nearly 2% returns in December, surprising many investors who were underweight in CGBs by an average of 3 percentage points at the end of November [2][7] - PBoC's Role: The People's Bank of China (PBoC) has been a significant buyer of CGBs, purchasing RMB1 trillion from August to December, absorbing 40% of net CGB supply during this period [3][4] - Future Purchases: The PBoC is expected to purchase a minimum of RMB200 billion of CGBs monthly in 2025, potentially increasing to RMB300-400 billion per month [4] - Ownership Structure Changes: The ownership structure of CGBs and local government bonds (LGBs) has shifted significantly due to the PBoC's quantitative easing, with the 'Others' category rising rapidly [5] - Credit Impulse and Bond Yields: A continued decline in credit impulse and the PBoC's bond buying are seen as key drivers for lower bond yields in China [7] - Investor Demand: Insurance companies' demand for bonds remains steady, while asset management companies have increased their bond purchases due to poor equity market performance [8] Important but Overlooked Content - CGB Supply Expectations: CGB supply is expected to rise by RMB2 trillion to RMB6.5 trillion in 2025, driven by an increase in the fiscal deficit target from 3% to 4% of GDP [14][18] - Impact of Larger Issuance: Despite larger bond issuance, it has not negatively impacted bond prices, indicating that supply is not a significant determinant of bond yields [13] - Seasonal Trends: Historically, December has been the best month for CGBs, with expectations for a rally in March as policy anticipation builds for the National People's Congress [20] - Potential Catalysts for Change: Factors that could alter the outlook for lower rates include improvements in wage expectations and potential equity market stabilization measures by the PBoC [21] Forecasts and Trading Ideas - Revised Yield Forecasts: The forecast for the 10Y CGB yield has been revised down from 1.80% to 1.20% for year-end 2025, with a trading range of 1.20-1.60% anticipated [10][11] - Trade Recommendations: The recommendation to buy 10Y CGBs remains, with a target yield of 1.40% [7][23] This summary encapsulates the key points discussed in the conference call regarding the outlook for China's fixed income market and the role of the PBoC in shaping bond yields and investor behavior.