Data from the State Administration of Foreign Exchange shows that from February to March 2025, foreign capital increased its holdings of domestic bonds by US$26.9 billion, an increase of 84% year-on-year; from April 1 to 18, a net purchase of US$33.2 billion, maintaining a relatively high scale.

Text｜《Finance" reporter Tang Jun

Editor｜Zhang Wei

A trade friction that exceeded expectations has caused China's bond market to be bullish again.

On April 2, the Trump administration's "reciprocal tariff" policy was released, the market's risk appetite declined rapidly, the stock market fell significantly, and the Shanghai Composite Index fell by more than 7% in a single day.

Under market turmoil, a large amount of funds poured into the bond market to avoid risks, driving the bond market to rebound rapidly. From April 2 to 7, the 10-year Treasury bond yield fell by 16 basis points (corresponding to the rise in bond prices), hitting a seven-week low.

Foreign capital is also increasing its holdings of RMB bonds. Data from the State Administration of Foreign Exchange shows that from February to March 2025, foreign capital increased its holdings of domestic bonds by US$26.9 billion, an increase of 84% year-on-year; from April 1 to 18, a net purchase of US$33.2 billion, maintaining a relatively high scale.

After 40 days, the situation reversed. On May 12, China and the United States reached an important consensus. After the closing of A shares on the same day, Xinhua News Agency reported that China and the United States issued the "Joint Statement on the Sino-US Economic and Trade Talks" (hereinafter referred to as the "Joint Statement").

A spokesperson for the Ministry of Commerce made a speech on this, pointing out that, "The high-level economic and trade talks between China and the United States have made substantial progress, significantly lowering the level of bilateral tariffs. The United States has canceled a total of 91% of the additional tariffs, and China has correspondingly canceled 91% of the counter-tariffs; the United States has suspended the implementation of 24% of the 'reciprocal tariffs', and China has also suspended the implementation of 24% of the counter-tariffs."

After the release of the Joint Statement, Hong Kong stocks rose sharply, with the Hang Seng Index and the Hang Seng Technology Index closing up 2.98% and 5.16% respectively. The market risk aversion sentiment cooled down, Treasury bond futures fell collectively, and the 30-year main contract closed down 1.31%; the 10-year Treasury bond yield rebounded by more than 5 basis points to 1.69%, approaching the level before the introduction of "reciprocal tariffs" in early April.

"Go back to the starting point overnight." Market insiders sighed.

Figure 1: Performance of 10-year and 30-year Treasury bond yields since the beginning of the year

Since the beginning of the year, the seesaw effect of stocks, bonds and funds in the Chinese market has been significant.

In 2024, against the backdrop of lack of safe assets, treasury bonds are highly favored by the market. The yields of government bonds for all maturities fell sharply throughout the year, with a large margin exceeding market expectations and are called an "epic bull market."

On January 6, 2025, the 10-year Treasury bond yield recorded a historical lowest of 1.5966%. This round of "epic debt bull" has reached its peak, and potential interest rate risks have also caused regulatory concerns. Subsequently, the People's Bank of China (hereinafter referred to as the "Central Bank") focused on tightening the liquidity of the bond market, coupled with favorable factors such as revaluation of core technology assets, driving the market risk appetite to recover, and market funds were invested by bonds.

In the first quarter of 2025, the bond market was in full swing, and the 10-year treasury bond yield rebounded to a stage high of 1.9%. During the same period, the stock market performed well. Around the Spring Festival holiday, the major indexes of A-shares and Hong Kong stocks showed an upward trend, and the range increase of the Hang Seng Technology Index once exceeded 40%.

As of May 6, the 10-year Treasury bond yield was 1.6293%, falling back to the historical low. The funding balance once again tilted towards the bond market.

"Since the US provoked the so-called 'reciprocal tariffs', the bond market has been flat overall, and the long-term interest-rate bond yields have declined significantly." Zhao Zenghui, chief analyst of fixed income at Changjiang Securities, said that since mid-to-late April, the bond market has lacked the main line and the overall market has maintained a volatile market.

On May 7, the three major financial management departments announced a package of incremental financial policies. Among them, the central bank announced a total of ten incremental monetary policies, including comprehensive reserve requirement ratio cuts, interest rates and interest rates. According to Hu Yuwei, chief policy analyst of CITIC Construction Investment, the central bank's incremental policies will bring about 2.5 trillion yuan of incremental funds to the real economy.

On the day of the press conference, the yield on long-term treasury bonds rose slightly. CFETS (China Foreign Exchange Trading Center) data showed that the 10-year treasury bond yield rose by 1.35 basis points to 1.6428% on the same day. On the same day, the stock market surged and fell. As of the close, the A-share Shanghai Composite Index, Shenzhen Composite Index and ChiNext Index rose by 0.8%, 0.22%, and 0.51%, respectively.

"The reduction of reserve requirement ratio and interest rate cuts are implemented, and the positive news in the bond market may be released." Liao Zhiming, chief analyst of fixed income at Huayuan Securities, wrote an article saying that the 1.6% 10-year treasury bond yield is basically priced at a rate cut of 30 basis points. The 10 basis point interest rate cut has left the bond market hopeless, and it may be that the positive news is released. At the same time, Liao Zhiming believes that insurance funds are expected to accelerate entry into the market, which will promote the positive development of the stock market. It is recommended to pay more attention to stock market opportunities.

Looking ahead, several analysts said tariff negotiations will be a key variable that affects bond market performance.

Liao Zhiming believes that if China and the United States reach an agreement in the next six months to lower tariffs to the level of the year, the high point of the 10-year treasury bond yield may still reach 1.9% this year, and the economy is still expected to stabilize in 2025.

"In the future, uncertainty of tariff policies, including China's countermeasures and progress in tariff negotiations, will have an impact on market confidence and risk preferences, and it needs to be observed continuously." Wang Jun, chief economist of Huatai Asset, said, "If the stock market and bond market have to be compared, the bond market may have a greater chance of the bond market in the second quarter than the stock market."

Comprehensive reserve requirement ratio cuts: bond market fluctuates at high levels

On May 7, the heads of the three major financial management departments gathered at the press conference of the State Council Information Office. Following the package of incremental policies on September 24, 2024, it once again brought a new package of incremental financial policies.

Central Bank Governor Pan Gongsheng announced a total of ten monetary policies in three aspects, including a comprehensive reduction in reserve requirement ratio and interest rates, a reduction in provident fund loan interest rates, a reduction in the interest rate of re-lending tools, a establishment of 500 billion yuan of "service consumption and pension re-lending", and a creation of a risk sharing tool for technological innovation bonds.

Among them, the comprehensive reduction of the reserve requirement ratio by 0.5 percentage points will release 1 trillion yuan of long-term liquidity; the policy interest rate will be reduced by 0.1 percentage point, which is expected to drive the LPR (loan market quotation interest rate) to be simultaneously lowered by 0.1 percentage point.

"This is the second time that the central bank announced a rate cut and reserve requirement ratio cut on September 27, 2024, two monetary policies have taken action at the same time, indicating that this year's moderately loose monetary policy has begun to make comprehensive efforts in the direction of stabilizing growth." Wang Qing, chief macro analyst of Oriental Jincheng, said.

Generally speaking, loose capital will drive the bond market to strengthen. On the day the policy was implemented, the bond market weakened slightly.

Data shows that on May 7, Treasury bond futures closed down across the board, with the 30-year main contract falling 0.62%, the 10-year main contract falling 0.19%, the 5-year main contract falling 0.08%, and the 2-year main contract falling 0.01%.

Treasury bond yields perform differentiatedly. The yields of 5-year and below treasury bonds fell collectively, with the yields of 1-year and 3-year and 0.77 basis points respectively; the yields of 6-year and above treasury bonds rose collectively, with the yields of 10-year and 30-year and 2.05 basis points respectively, to 1.6428% and 1.8475%.

In this regard, Wang Qing said that based on the sharp decline in bond market yields since the fourth quarter of 2024, as well as the general rules of the 10-year treasury bond yield and policy interest rate spread, the current bond market has overdrawn this monetary policy adjustment to a large extent. At the same time, the increase in structural monetary policy tools and the reduction of provident fund loan interest rates may also cause certain negative effects on the bond market. This means that there is little room for the 10-year Treasury yield to further decline at the current level.

In fact, on December 9, 2024, the Political Bureau of the Central Committee proposed to "implement moderately loose monetary policy", announcing that the tone of monetary policy shifted from "stable" to "moderately loose" for the first time in 14 years. Subsequently, the bond market rose sharply, and the yields of government bonds for each term accelerated downward. Among them, the yield on the 10-year treasury bond fell rapidly from around 1.9% to around 1.6%.

"The 10-year treasury bond yield is basically priced at 1.6% with a 30BP (basis point) interest rate cut expectation. The implementation of 10BP interest rate cut has left the bond market hopeless, which may be that the positive news will be released." Liao Zhiming said.

Looking ahead to the future market, how will the bond market perform?

Zhao Zenghui believes that the subsequent performance of the bond market depends on fundamentals and the supply and demand of funds.

"From the fundamentals, under the disturbance of trade frictions, the fundamentals of the economy are under certain pressure, which means that the bond market lacks the basis for a pullback. From the perspective of funds, the centralized fiscal deposit issuance in the second quarter, the central bank's recovery of net injection, and the decline in broad financing demand will jointly bring about a decline in capital prices." Zhao Zenghui analyzed that the bond market still has allocation value at present, but considering the current point, the probability of a sharp decline in bond yields in the short term is not high.

CICC believes that the bond bull market may continue.

"Whether it is based on monetary policy relaxation and support for entities themselves or on the exchange rate stabilization, the money market and short-term interest rate compensation may have just begun. The short-term bond curve may become steeper, and the decline in short-term interest rates will also open up downward space for medium- and long-term interest rates." CICC believes that the adjustment of long-term interest rates is more structural than bond negatives. When the short-term interest rate falls back to the agreed level and the maturity spread expands again, long-term interest rates are also expected to fall.

Wang Qing also said that overall, the subsequent long-term bond yields will decline steadily.

Some analysts also hold different views.

"It is recommended to focus on the progress of tariff negotiations in the future. We still believe that if the tariffs are reduced to 20%, long-term bonds may face adjustments at the 20BP level." Liao Zhiming said bluntly, "It is recommended to pay more attention to the stock market and convertible bond opportunities, and pure bond investment is on the thin ice."

Stock and bond seesaws show results: trends are reversing repeatedly

In fact, since the beginning of the year, China's stock and bond market has shown a clear seesaw effect.

"The stock and bond market in the first quarter is generally a seesaw effect." Looking back at the performance of the stock and bond market in the first quarter of 2025, Wang Jun believes that around the Spring Festival, investors' risk appetite has increased significantly, and the stock market performed well in the first quarter. The bond market is affected by multiple negative factors, and the overall trend is weak, which can be described as twists and turns.

"The liquidity of the money market was tightened at the beginning, and risk appetite also rebounded, so the bond market was in full swing in the first quarter, which was completely opposite to the stock market." Wang Jun analyzed that short-term bond yields rose significantly in January; after mid-to-late February, with the significant improvement in social financing and credit data and a good start, the long-term yields rose significantly, indicating that the market's risk appetite is still recovering; in late March, the 10-year treasury bond yield hit the high of 1.9% of this rebound, and then fell back to around 1.8%, and the bond market performed generally in the first quarter.

Since April, the Trump administration has introduced a "reciprocal tariff" policy, and the stock and bond trend has rapidly reversed.

On April 7, affected by the "reciprocal tariff" policy, global stock markets encountered "Black Monday". The major A-share indexes fell sharply. As of the close of the day, the Shanghai Composite Index fell 7.34%, falling below 3100 points; the Shenzhen Component Index fell 9.66%; and the ChiNext Index fell 12.5%.

China's Treasury Futures closed up across the board, with the 30-year main contract rising 1.79%, approaching its historical high. The prices of current bonds for each term of government bonds rose, corresponding to a sharp decline in the yield on government bonds. Wind data shows that the yield of the 10-year treasury bond "24 interest-bearing treasury bond 11" fell by 8.4 basis points at 1.6310%. According to CFETS data, the yield on maturity of 10-year Treasury bonds fell by 8.47 basis points to 1.633%.

Credit bond yields have also generally declined. Taking the 3-year medium-term notes as an example, the downward decline in the yields of bonds of each grade is between 12 and 13 basis points, and the bond market has shown a significant recovery in the short term.

Yuan Haixia, director of China Chengxin International Research Institute, told Finance that the US "reciprocal tariff" policy mainly affects the bond market through three major channels: First, it significantly boosts the market's risk aversion sentiment, the equity market has undergone significant adjustments, and the stock and bond seesaw effect promotes more funds to flow to safe-haven assets. Second, the uncertainty of economic recovery has increased, causing adjustments to expectations for economic fundamental recovery. Weaker foreign demand and expectations of global trade contraction have increased uncertainty about the recovery of China's economic fundamentals, and the shift in expectations has driven bond demand and yields to decline. Third, expectations of monetary policy easing heat up, and the market traded in advance the expectation of lowering the reserve requirement ratio and interest rate cuts, further lowering bond yields.

On May 12, the stock and bond trend reversed again.

In the early morning of the same day, Xinhua News Agency reported that the high-level economic and trade talks between China and the United States reached an important consensus and made substantial progress. The two sides agreed to establish a China-US economic and trade consultation mechanism. China and the United States will finalize the relevant details as soon as possible and will issue a joint statement reached at the talks on May 12.

After the opening of the day, A-shares and Hong Kong stocks rose, treasury bond futures fell across the board, and long-term treasury bond yields rose. As of the closing at 3 pm on the 12th, the A-share Shanghai Composite Index closed at 3369.24 points, up 0.82%.

After the closing of A-shares, Xinhua News Agency issued the full text of the "Joint Statement". A spokesperson for the Ministry of Commerce said that the high-level economic and trade talks between China and the United States have made substantial progress, significantly lowering the level of bilateral tariffs. The United States has canceled a total of 91% of the additional tariffs, and China has correspondingly canceled 91% of the counter-tariffs; the United States has suspended the implementation of 24% of the "reciprocal tariffs", and China has also suspended the implementation of 24% of the counter-tariffs.

Hong Kong stocks immediately rose sharply, with the Hang Seng Index and the Hang Seng Technology Index closing up 2.98% and 5.16% respectively. The decline in Treasury bond futures expanded, with the main 30-year contract closing down 1.31%. The yields of treasury bonds for each term rose collectively, with the yields of 10-year and 30-year bonds rising by more than 5 and 7 basis points respectively.

As of the close of the 12th, the performance of major indicators of Chinese stocks and bonds has returned to the level before the "reciprocal tariffs" in early April.

Figure 2: Performance of major stock indexes in China since the beginning of the year

"As a new external impact, will the 'peer tariffs' challenge to the logic and trends of China's asset revaluation? I think it needs to continue to observe." Wang Jun said, but the market must include such high "peer tariffs" into the new analysis framework.

At the same time, Wang Jun emphasized that the logic supporting the revaluation of China's core assets has not been fundamentally shaken by the impact of "reciprocal tariffs".

"The new and old economic driving force is changing, real estate is gradually stabilizing, and the proportion of the "three new" economy represented by artificial intelligence is increasing. If we confirm that these trends continue to evolve in a positive direction, the capital market will definitely fully reflect and price the historic changes in China's economic structure." Wang Jun suggested that we have basic confidence in the medium- and long-term value revaluation of China's assets.

"If China and the United States reach an agreement in the next six months, the tariffs will be reduced to the level of the beginning of the year, the high of the 10-year treasury bond yield in the year may still reach 1.9%, and the economy is still expected to stabilize in 2025." Liao Zhiming said, "As China and the United States reach a preliminary agreement to significantly reduce tariffs, the bond market may face obvious adjustments."