Is the bond bull market over?

Core Viewpoints

After the holiday, Deepseek ignited a global AI+ wave, leading to a round of asset revaluation driven by technology in Chinese assets. This has been profoundly confirmed by the performance of the technology sector in China's A-shares and Hong Kong stocks after the holiday.

The current question is whether the revaluation of Chinese assets means a rise in risk appetite, triggering interest rate hikes, and ending the four-year bull market in Chinese bonds?

We believe that the bond adjustment since February is related to multiple short-term factors resonating—central bank liquidity tightening, the rise in risk appetite for Chinese assets, a rebound in social financing in January, and better-than-expected first-tier real estate data after the holiday.

Risk appetite has never been a determining factor for bond direction; the direction of bonds depends on credit demand, fundamentally looking at the trajectory of the land economy. Currently, feedback from third and fourth-tier data indicates that the real estate sector has not yet reached a major turning point. Therefore, the bond market adjustment in February is a mid-term fluctuation in the bond bull market, rather than the end of a four-year bond bull market.

The three most noteworthy market phenomena in the past week:

U.S. stock market adjustment, significant rise in Chinese bond rates, and increasing enthusiasm for Chinese technology stocks.

After the holiday, Deepseek triggered a global AI craze, affecting both Chinese and U.S. assets, and leading to a round of revaluation of risk assets in China (A-shares and Hong Kong stocks). Last week, Alibaba's performance exceeded expectations, and for the first time, Alibaba clearly proposed "AI-driven" as a core strategy, fueling the AI+ craze.

Deepseek once caused fluctuations in the U.S. stock market, which then stabilized. As the narrative of Chinese AI impacts the U.S. AI narrative, coupled with the unexpected contraction of the U.S. services PMI in February, the risk appetite for U.S. assets has cooled, leading to a weakening of the U.S. stock market.

Liquidity has continued to tighten for a month, and discussions about credit stabilization have emerged due to Chinese real estate and social financing data. The narrative of revaluation of Chinese assets has progressed, and last week, the yield on Chinese long-term bonds significantly adjusted, with the ten-year government bond yield returning above 1.7%.

1. Recent bond market adjustments are resonating with three factors.

The continuous tightening of liquidity by the central bank is undoubtedly a fundamental reason.

On February 20, the LPR quotation remained unchanged, and the long-awaited interest rate cut did not materialize. After consecutive failures to meet expectations for reserve requirement ratio cuts and interest rate reductions, interbank funding rates have significantly risen.

The one-year interbank certificate of deposit rate is nearing 2%, resulting in a significant inversion with the ten-year government bond yield. Even though last week the ten-year government bond yield rebounded from 1.6% at the beginning of February to 1.72% (closing on February 21), the ten-year government bond and one-year interbank certificate of deposit still maintain a basis of around -25bp, the lowest since 2019.

The sentiment for long-term bonds is triggered by the rebound in social financing and the transaction volume and price of second-hand houses in first-tier cities.

The central bank's tightening of the funding side has been maintained for more than a month, and the inversion between interbank certificates of deposit and government bond yields began on January 10. In the face of a tight funding environment, the bond market maintained a period of "asset shortage" trading, and long-term rates remained stable.

It wasn't until the release of social financing data in January, which showed corporate medium and long-term loans exceeding expectations, combined with the rebound in first-tier real estate volume and price data, that the market began to question whether the credit downturn would end in 2025 and whether signs of recovery had already arrived. The final result was a weakening of sentiment in long-term rates over the past two weeks After the holiday, DeepSeek triggers a wave of asset revaluation in China, affecting bond market sentiment.

After the holiday, the AI narrative expands, with Chinese A-shares and Hong Kong stocks trading in AI+ and AI applications. The narrative of asset revaluation in China is unfolding, repeatedly boosting risk appetite. Coupled with a persistently tight liquidity environment and concerns about credit stabilization, bond funds ultimately retreated, triggering negative feedback in the funding and bond markets.

II. Has the current bond bull market come to an end?

Since 2021, this bond bull market has lasted for 4 years. Both in terms of gains and duration, this bull market is historically rare. In this epic bond bull market, interest rates have also undergone several adjustments, such as the wealth management redemption storm at the end of 2022 and the liquidity fluctuations from September to November 2023.

Is the bond adjustment that began in February the end of the four-year bond bull market, or just a fluctuation in the middle of the bull market? This is the most concerning topic in the current market.

We adhere to two judgments:

First, AI is driving the revaluation of Chinese technology, bringing a seesaw sentiment between stocks and bonds in trading. However, risk appetite has never been a determining factor for bond direction; the direction of bonds depends on credit demand.

Second, the direction of the bond bull and bear market depends on credit demand, which ultimately relies on residents and off-budget financing from local governments. Although the volume and price of second-hand housing in first-tier cities have rebounded after the holiday, we cannot take this as a leading indicator for the national real estate market. Current feedback from third and fourth-tier real estate data indicates that the real estate chain has not yet signaled a turning point.

III. When will the current bond adjustment end?

Since the bond adjustment began in February, the most direct explanatory factor is the central bank's liquidity. To determine when this bond adjustment will end, the most important thing is to assess the pace of the central bank's liquidity.

The short-term support for the fundamentals from the export rush in March is weakening, and after the "golden March and silver April," the trading heat in first-tier real estate may cool down. The pace of the Sino-U.S. tariff game is accelerating in March, so we expect a change in the central bank's liquidity conditions in April.

Authors of this article: Zhou Junzhi S1440524020001, Wang Zexuan S1440520070003, Source: CSC Research Macro Team, Original Title: "Is the Bond Bull Market Over? | Zhou Zhouzhi Dao," content has been edited.

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