In recent times, China's bond market has showcased an impressive performance, particularly the 10-year government bonds which have seen yields falling remarkablyOver the past month, these yields have consecutively dipped below 2.0%, 1.9%, and 1.8%, before briefly nearing 1.7%. Such a trend has set off a surge in bond funds, pushing their net values to unprecedented heightsThis raises the question: what has fueled this robust behavior in government bonds, and can we expect a continuation of this "bull market"?

Beginning on November 18, the downward trajectory of the 10-year government bond yield has been quite evident, particularly as we transitioned into December, a month that marked a historic first where yields fell below 2%. This was only the beginning of a record-breaking declineThe bond market reacted positively to these drops, with futures for 30-year, 10-year, and 5-year government bonds reaching all-time highs

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When we analyze this over a larger time frame, the 30-year government bond futures have risen more than 15% since the start of the year, while the 10-year futures have seen an increase exceeding 5%.

This remarkable surge in bonds can be attributed to a mix of factorsData from Wind reveals that among the 6,905 bond funds tracked (counting different share classes separately), 3,250 of these reached historical net value peaks by December 16. Overall, the average annual return for bond funds has surpassed 4%, with over a thousand funds exceeded 5%, reflecting the overall strength of the bond market this year.

Analysts such as Zhou Maohua from Everbright Bank's macro research team attribute this upward momentum in the bond market to a robustly accommodative monetary policy and a high demand for quality asset allocations among institutionsWith the shift in overseas policy toward a cycle of interest rate cuts, there is a forecast of similar easing measures expected in China as well, which supports the bond market's rise.

CITIC Securities' chief economist Mingming notes that the dipping yields in long-term bonds are also indicative of positive sentiment surrounding local bond issuances, coupled with a relatively loose cash flow and a cooling-off effect on stock market spillovers

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He mentioned that the current opportunities in bond investment have been exacerbated by the initiation of a year-end rally, a trend that has been developing since 2019 and continues this year with a notable pattern of falling yields as the year draws to a close.

This year-end phenomenon can be attributed to the behavior of insurance and other allocation-type funds, which tend to front-load their investments as the calendar year endsConcurrently, other institutions may engage in strategic plays that intensify this "run ahead" effect, further driving down interest rates for long-term and ultra-long-term bonds.

However, amid this elation over falling interest rates, bond investors are also faced with anxietyAs Chen Jianheng, a fixed-income analyst at China International Capital Corporation, points out: the excitement stems from the substantial profits brought in by bonds this year, while the concern lies in the impending challenge of achieving future profits in a climate of declining interest rates

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Questions loom over the sustainability of this current "bull market" in bonds.

Wang Kun, deputy general manager and fund manager at Penghua Fund’s Mixed Assets Investment Department, anticipates that the bond market may continue to show strength during the easing cycle, albeit with some potential fluctuations as the current yield levels are perceived to be somewhat low.

Moreover, the efficiency of monetary policy transmission across different markets should not be overlookedAnalysts have pointed out that the bond market has consistently displayed characteristics of adjustments that exceed expectations this year, with recent rapid declines in bond market yields not mirrored in other marketsThe dovish statements regarding monetary policy's “moderate loosening” suggest a long-term benefit for economic recovery and a rational uptick in prices, which could subsequently drive bond yields higher.

Zhou Maohua highlighted that since a series of policy measures were introduced in late September, societal expectations have seen a notable reversal

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As China intensifies its counter-cyclical regulation policies, a swifter economic recovery is envisaged, supported by domestic consumption and demand rebounding and a more balanced supply-demand dynamicAdditionally, with an increase in government bond supply anticipated for next year, along with global inflation risks, careful consideration of the room for declining interest rates is warranted.

The Central Bank of China has issued several warnings regarding the influx of capital flooding into the bond market this yearPan Gongsheng, the governor of the Central Bank, emphasized the need for risk advisories concerning long-term government bond yields, and the importance of a robust dialogue with the market to mitigate systemic risks associated with the potential herd behavior leading to steep, one-sided declines in long-term yields.

As the world of finance keeps evolving and adapting to changes, the bond market in China will remain a focal point of scrutiny, particularly in light of its recent rally