From a collective morning rally and continuous record highs to an afternoon plunge and a full-line decline,the bullish bond market that had been advancing vigorously encountered an "emergency brake."

Behind this market trend lies the central bank's rare release of a significant policy signal during the trading session.On July 1st,the central bank stated that in order to maintain the stable operation of the bond market,based on a prudent observation and assessment of the current market situation,the People's Bank of China decided to carry out government bond lending operations with some primary dealers of the open market business in the near future.

In fact,for some time now,the central bank has been paying close attention to the issue of long-term bond yields and has repeatedly warned of risks.However,the market has its own ideas,with institutions scrambling to acquire long-end interest rate bonds,causing long-term bond yields to repeatedly break through the 2.5% interest rate lower limit.

Following the release of the aforementioned news by the central bank,government bond futures plummeted that day.By the close,the 30-year government bond futures main contract fell by 1.06%.

Considering the views of several authoritative market experts,the central bank's intervention during the trading session is related to the long-term special government bonds moving in an unexpected one-sided trend.This move implies that the central bank may soon carry out government bond selling operations in the open market.By actual operations,it affects the supply and demand balance of bonds in the secondary market,guides market expectations,and prevents long-term government bond yields from deviating significantly from the corresponding policy interest rate center,which will have a stronger effect than previous risk warnings.It is expected that long-term bond yields will rebound significantly in the short term.

Government bond selling operations are approaching.

Borrowing government bonds from primary dealers of the open market business means that the central bank's buying and selling of government bonds will enter the operational phase.

Industry experts have said that after the central bank borrows the bonds and sells them in the secondary market,it will affect the supply and demand relationship in the bond secondary market,thereby influencing the trend of interest rates and preventing interest rates from deviating excessively from a reasonable level.

On July 1st,government bond futures rose collectively at noon,with the 30-year main contract up by 0.36%,and the 10-year main contract up by 0.1%,both continuing to set new highs during the session.In addition,the 5-year main contract rose by 0.06%,and the 2-year main contract rose by 0.02%.

However,after the central bank released the aforementioned news,government bond futures plummeted.By the close,the 30-year government bond futures (TL2409) were reported at 108.440 yuan,down 1.160 yuan,a decrease of 1.06%; the 10-year government bond futures (T2409) were reported at 104.9175 yuan,down 0.385 yuan,a decrease of 0.37%; the 5-year government bond futures (TF2409) were reported at 103.765 yuan,down 0.245 yuan,a decrease of 0.24%; the 2-year government bond futures (TS2409) were reported at 101.884 yuan,down 0.080 yuan,a decrease of 0.08%.Market analysis suggests that since borrowing government bonds entails certain costs and they must be repaid upon maturity,for the borrower of the government bonds,profits can only be generated when the bond prices fall (corresponding to an upward movement in the yield to maturity).Therefore,the market generally considers that the bond borrowers are essentially bearish on bonds.

This is also the reason for the sharp decline in the government bond market following the central bank's announcement.Wang Qing,Chief Macro Analyst at Orient Jincheng,believes that after the central bank borrows government bonds from some primary dealers in the open market operations,it can sell these bonds in the secondary market,thereby lowering the market prices of the related government bonds and raising their yields.

Ming Ming,Chief Economist at CITIC Securities,believes that this move by the central bank implies that there may be a government bond selling operation in the open market in the near future.As the 10-year government bond yield has dropped to a historical low,selling government bonds is beneficial for stabilizing long-term bond rates and preventing interest rate risks.

Dong Ximiao,Chief Researcher at China United Finance,believes that this indicates that the central bank will carry out government bond selling operations in the open market in the near future,which will affect the supply and demand relationship in the secondary bond market,and thus may affect the trend of interest rates,thereby avoiding excessive deviation of medium and long-term government bond rates from a reasonable level.

In addition,some market analysis points out that the central bank has chosen to carry out government bond borrowing operations at this particular time,also considering that the liquidity situation is still primarily stable.The central bank does not want to cause too much fluctuation in the liquidity,in order to maintain the stability of the market to the greatest extent.

Wang Qing predicts that the central bank will mainly borrow medium and long-term government bonds with a maturity of 10 years or more,and the scale of borrowing,whether or when to sell,will be determined by the central bank based on the situation in the bond market.

The central bank frequently communicates for expectation management.

Since April of this year,the central bank has frequently managed expectations for long-term bond yields.

For example,in the first and second quarter meetings of the Monetary Policy Committee in 2024,it was clearly mentioned that "attention should also be paid to the changes in long-term yields during the economic recovery process."

On April 23,a person in charge of the central bank stated that in the future,as ultra-long-term special government bonds are issued,long-term bond yields will operate within a reasonable range that matches the long-term economic growth expectations.On June 19th,at the Lujiazui Forum,the central bank governor Pan Gongsheng stated that there is a particular need to focus on the maturity mismatch and interest rate risks associated with non-bank entities holding a large amount of long-term bonds.He emphasized the importance of maintaining a normally upward-sloping yield curve to keep the market's positive incentive effect on investment.

The central bank's continued attention to the issue of long-term bond yields has had a certain impact on the interest rates of ultra-long bonds.However,against the backdrop of no significant improvement in economic data,the actual impact of the central bank's expectation management on market sentiment is gradually diminishing,and long-term interest rates still show a strong downward impulse.

Dong Ximiao indicated that this year,there has been an insufficient effective demand for financing,leading to a situation where "assets are scarce." Some small and medium financial institutions have found it difficult to effectively allocate credit.At the same time,market credit risks have increased,and financial institutions are facing significant pressure to maintain the quality of their assets.Under such circumstances,government bonds,backed by national credit,offer strong security and have become an important choice for financial institutions in asset allocation.

Wang Qing believes that as the urban construction and real estate industries continue to undergo adjustments,banks and some non-bank institutions are experiencing a "scarcity of assets." Additionally,the slower pace of government bond issuance since the beginning of the year has exacerbated this phenomenon,leading some institutions to increase their allocation of medium and long-term government bonds.This has resulted in a continuous and significant downward trend in the yields of these bonds,which has noticeably deviated from the corresponding policy interest rate levels.

Looking at the normal operation of the market in recent years,a yield range of 2.5% to 3% may be reasonable for long-term government bonds.However,in the recent period,the yields of medium and long-term government bonds have deviated from the policy interest rate levels on multiple occasions.For instance,on June 28th,the yields of 10-year and 30-year government bonds dropped to 2.21% and 2.43%,respectively.

"Since 2024,the downward trend in the yields of medium and long-term bonds in our country has been quite evident,with the 30-year government bond yield operating below 2.5%,and the 10-year government bond yield reaching a 20-year low at one point," said Dong Ximiao.

According to Zhang Xu,the chief fixed-income analyst at Everbright Securities,investors in the market who are bullish on long-term and ultra-long-term interest rate products generally believe that the central bank does not have enough tools to guide the corresponding term yields upwards.However,compared to the use of specific tools,the attitude of the regulators is more critical.For example,some investors once thought that the central bank did not hold many long-term and ultra-long-term bonds,and was roughly in a situation of "having no bonds to sell." On July 1st,the central bank announced that it would carry out government bond lending operations,which immediately resolved the aforementioned so-called obstacle.

The low yields of medium and long-term government bonds also reflect,to some extent,that the market's confidence in the future economy still needs to be further boosted.Wang Qing stated that from the perspective of economic fundamentals,the macroeconomy has been on an upward trajectory since the beginning of the year,but it also faces many challenges,including insufficient effective demand,low price levels,significant business pressures on companies,numerous risks and hidden dangers in key areas such as real estate,and increasing complexity,severity,and uncertainty in the external environment.In particular,the official manufacturing PMI has been in a contraction range for May and June,indicating that the foundation for the current economic recovery is not yet stable.

The bottom of this round of long-term bond interest rates has basically been identified.

Previously,in response to media inquiries,the central bank had stated that it is highly attentive to the changes in the bond market and potential risks,and it will carry out operations to sell low-risk bonds,including government bonds,if necessary.The central bank's operations on government bonds involve both purchases and sales,with a high degree of flexibility,and are not one-way operations.The market has already anticipated this.

At the same time,the market is also paying attention to the scale of the central bank's bond borrowing this time,when it will be sold,and its impact on long-term bond yields.For example,some investors believe that the scale of a single bond borrowing may be limited,and its impact on the market may also be limited.

In response,Zhang Xu stated that the central bank has not explicitly stated that it will only carry out one bond borrowing operation,nor has it ever explicitly stated that it will not use other tools to guide the upward movement of long-term government bond yields.If the trend of bond yields in the next period does not satisfy the monetary authorities,it would be reasonable to borrow and sell government bonds again and to adopt other policy tools.

Zhang Xu judged that within the next two quarters,it is highly probable that the 10-year government bond yield will reach 2.5%.During the bull market phase,investors tend to unconsciously emphasize the importance of positive factors and often fail to see the negative factors; once the market adjusts,investors will overemphasize the negative factors.For instance,in the third quarter of 2022,investors generally believed that yields would continue to decline,and few expected a significant rise in the fourth quarter.After the yield rose in the fourth quarter,investors fell into anxiety that yields would rise indefinitely.Similarly,if the 10-year government bond yield rises to 2.3%,most investors in the market will again change their views on the future trend of yields,and long-term government bond yields will eventually return to a reasonable range that matches long-term economic growth expectations.

"The bottom of this round of long-term bond rates has basically been explored,and the next main focus is on the magnitude of the rebound," Wang Qing believes that in the short term,long-term bond rates will rebound significantly,and it is not ruled out that the 10-year government bond yield may rise above the previous high of around 2.30%.As for whether the downward trend of long-term bond rates in the second half of the year can be reversed,it depends on the strength of the central bank's operations,and it will also be affected by the economic and price trends in the second half of the year,especially whether the real estate industry can achieve a soft landing quickly,which is the key to the current economic situation and market expectations.

It is worth mentioning that the rise in yields in the fourth quarter of 2022 led to a decline in the net value and a reduction in the scale of wealth management products such as bank wealth management and public funds.There was also a mutually reinforcing effect between the decline in the net value of funds and the reduction in shares of wealth management products.Although the current bond market is not completely the same as before the adjustment,there are also many similarities.