(Yicai) Aug. 26 -- As the Chinese bond market continues to strengthen, market participants believe that the bullish narrative remains intact despite short-term disruptions. However, they advised caution.

The main 30-year Chinese bond contract yesterday fell 0.07 percent to CNY116.62 (USD17.35). Meanwhile, the 10-year, five-year, and two-year ones dropped 0.04 percent to CNY109.54, 0.04 percent to CNY106.56, and 0.02 percent to CNY102.62, respectively. A decline in bond prices indicates an increase in bond yields.

The yield on the 30-year Chinese government bond ‘26 Ultra-Long Special Treasury Bond 04’ rose 0.2 basis points to 2.164 percent in the spot bond market yesterday. That on the 10-year Chinese government bond ‘26 Interest-Bearing Treasury Bond 10’ also increased 0.2 basis points to 1.683 percent.

The Chinese bond market has sustained the better-than-expected rally that began in mid-to-late July this month, with long-term bonds strengthening. For instance, the yield on ‘26 Interest-Bearing Treasury Bond 10’ fell from over 1.7 percent to around 1.68 percent, touching a low of 1.6645 percent before closing at 1.671 percent on Aug. 18.

The yield on ‘26 Ultra-Long Special Treasury Bond 04’ also strengthened, dropping to below 2.16 percent and even hitting a historical low of 2.1455 percent on Aug. 18, before closing at 2.149 percent.

Trading institutions, such as funds, continuously lengthening their duration could increase long-end risks, said Yang Yewei, fixed income analyst at Guosheng Securities. Duration is the average time it takes to recover a bond’s whole interest and principal, which serves as a metric to measure the sensitivity of bond prices to interest rate changes.

For risk management purposes, regulators may step up interventions, which would spark some market anxiety over long-term bonds, Yang noted.

The bullish narrative in the bond market since July has not derailed, said Liu Yu, chief fixed income analyst at Industrial Securities. The underlying drivers are the rapid correction in the tech sector, which has lowered market risk appetite, and the rising expectations of monetary easing following economic weakening, she added.

Liu also cautioned that event-driven disruptions, such as signals of marginal tightening in interbank liquidity and the potential acceleration of government bond issuance, could trigger phased profit-taking. Nevertheless, these short-term headwinds are unlikely to reverse the bullish trend, and long-end interest rates are expected to fluctuate within a range in the near term, she noted.

On the supply side, the pace of government bond issuance has been slower than expected since the second quarter, serving as a significant bullish variable for the market. But September is a crucial juncture for the third-quarter economic sprint, so the market is about to shift focus again to whether the roll-out of new supply will accelerate.

The pressure from government bond supply may become more pronounced in the coming months, Yang predicted. However, based on historical experience, the correlation between supply and interest rates is not significant.

In fact, government bond supply has high predictability, and supply shocks are often expected, so the impact usually materializes in advance, Yang explained. Even when the supply actually lands, the market may already be pricing in the effects of the following supply drop.

Moreover, during periods of heavy government bond supply, monetary policy often steps in to coordinate. He expects the low point for the 10-year treasury bond yield to be around 1.6 percent in the second half, while that for the 30-year treasury yield to approach 2 percent.

Long-end interest rates in overseas bond markets, especially US treasury bonds, have recently remained under strong pressure. The clear divergence in pricing between domestic and foreign bonds has played out again following the US-Iran conflict, sparking attention and discussion.

The rise in overseas long-end interest rates is not an isolated event but a combined result of artificial intelligence financing overcrowding demand for government bonds, sovereign fiscal expansion and debt concerns, shrinking demand from central banks and institutions, and increasing tail risks of inflation, said Zhang Jiqiang, chief fixed income analyst at Huatai Securities.

In contrast, Chinese government bond interest rate pricing remains dominated by weak domestic demand, a relatively loose liquidity environment, and an asset shortage, Zhang noted, adding that capital oversight and a low proportion of foreign ownership make external transmission relatively weak.

Editor: Futura Costaglione