The year 2025 heralded a promising beginning for the bond market, often referred to as "opening day red" in Chinese culture, indicating a good startHowever, as the months progressed, the bond market began to experience significant fluctuations and adjustmentsAs data reveals, there has been an alarming decline in key bond futures, with the 30-year government bond futures sinking more than 2% since February 14, reflecting a broader trend of decreasing values across various maturities, including the 10-year, 5-year, and 2-year government bond futures as well.

Such unexpected turns have sparked a divide among investorsWhile some have embraced a strategy of "buying the dip," indicating a willingness to purchase bonds during these downturns in anticipation of eventual recoveries, others have opted to reduce their holdings in light of the changing dynamicsAnalysts suggest that this discord among investor sentiments is reflective of underlying tension within a tightening capital environment, which may very well dictate the future trajectory of the bond marketAs the situation unfolds, it raises important questions: Is this merely a short-term adjustment, or are we on the brink of a prolonged period of fluctuations?

The bond market’s recent trends mark a stark contrast from its earlier robust performanceFollowing mid-February, noticeable downward movements in bond values were recordedOn February 20, for instance, the 30-year government bond futures saw an intraday drop exceeding 0.7%. Cumulatively, since February 14, there has been a measured decline of more than 2%, though other maturities seemed to follow suit with stark drops as well.

Economists and financial institutions have cautiously noted that these fluctuations are primarily induced by shifts in liquidityAccording to research by Minsheng Securities, since the beginning of the year, the central bank's monetary policy has been relatively conservativeThe post-holiday demands for cash, coupled with tax payment pressures and substantial net withdrawals affecting liquidity, have led to what they described as a "small money shortage" in the bond market, thereby pushing down the shorter-dated securities.

Further analysis reveals that following the Chinese New Year, the seasonal easing of capital availability has seen a modest recovery in bond interest rates

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However, this temporary relief was soon overshadowed by renewed tightening, indicated by a deeper inversion of overnight and seven-day interbank funding ratesThis retraction in capital availability has exerted continuous pressure on the shorter bonds, invoking further adjustments and thus flattening the yield curve.

Leading firms like Guangzhou Futures have noted that since mid-January, the directional changes in the bond market closely mirrored shifts in liquidityThe persistence of the central bank’s tightened liquidity provisioning, alongside their cautious communication regarding monetary policy and focus on the exchange rate, has dampened investor expectations for any potential loosening.

Macroeconomic indicators have painted a nuanced pictureJanuary’s credit data exceeded market expectations, and innovations like DeepSeek are reshaping the AI industry landscape, prompting a shift in fundamental expectations among market participantsYet, the ever-changing landscape continues to be influenced by a myriad of factors, including the uncertainty surrounding tariff policies enacted by the U.S. president and the ongoing dynamic of resource allocation among market players.

As the critical political gathering known as the Two Sessions approaches, speculations arise about the intensity of the policy landscape and its implications for the bond marketIncreased volatility and sensitivity to news are anticipated, coupled with the possibility of substantial government bond issuances post-conference, further complicating market dynamics.

In this challenging environment, the opinions among investors diverge noticeablySome exchange-traded funds (ETFs) linked to bonds have seen their scales fluctuate significantlyFor instance, despite the prevailing downward trends in the bond market, certain ETFs, such as the Pyongyang Zhongzhai 30-Year Government Bond ETF, have reported growth in size as investors step in to purchase amidst declining prices

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Conversely, funds like the Hai Futong Zhongzheng Short Bond ETF have faced shrinkage.

Specifically, the size of the Pengyang Zhongzhai 30-Year Government Bond ETF has surged to a noteworthy 10.813 billion yuan, attributing its growth to a strategic accumulation by investors during market dipsData from Wind indicates that by February 19, the circulating shares for this ETF had risen to 86.038 million, marking an increase of 5.22 million shares since February 14.

However, despite this overall trend, there was a slight decline on February 19 compared to the previous day, indicating that even amidst growth, there can be fluctuationsSimilarly, the BoShi Shanghai Stock Exchange 30-Year Government Bond ETF witnessed an intriguing spike in circulating shares, which rose dramatically during this recent period of market adjustments.

Conversely, the Hai Futong Zhongzheng Short Bond ETF faced a noticeable depletion in its funds, dropping from approximately 30.007 billion yuan at the start of the year to 26.804 billion yuan by February 19. This decline can primarily be attributed to ongoing adjustments in the short-end bond market, showcasing investor caution during periods of capital distress.

The stark dichotomy in ETF sizes reflects a growing rift in investor perspectivesWhile some are buoyed by the prospect of future bond appreciation, others are adopting a risk-averse approach, concerned by sustained high liquidity costsCICC has posited that the alarm caused by rising funding rates may be a temporary concern rather than a structural issue; therefore, investors should not panicShould the current liquidity normalization trend continue, it is anticipated that market rates will revert to align with policy rates.

Looking ahead, CITIC Securities cautioned that while the bond market may currently be in a consolidative phase, pressures from tighter liquidity and stronger-than-expected economic data might lead to further constraints on the bond market

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