A-shares correction triggers capital rebalancing; the bond market maintains a volatile pattern

(Source: Economic Daily)

Reprinted from: Economic Daily

Due to ongoing overseas geopolitical conflicts and other factors, the A-share market experienced a significant correction on March 23, with major indices falling collectively and market risk appetite rapidly declining. Against this backdrop, the “tug-of-war” effect between stocks and bonds reemerged, with some funds flowing back into the bond market.

However, overall, the bond market did not show obvious volatility. Supported by stable liquidity, the market maintained a sideways pattern. Institutions generally believe that the current bond market lacks a consensus for a bullish trend. In the short term, inflation and macroeconomic disturbances cause some fluctuations, but the scope for adjustment remains relatively limited.

Limited Impact from Stock Market Decline

Following the correction in A-shares, bond market sentiment marginally improved, but the overall response was mild. As of March 23, 30-year government bond futures rose slightly by 0.07%, closing at 110.71 yuan.

Looking at the interest rate structure, divergence continues. Short-term interest rates remain stable. Despite last week being a tax period, interbank funding rates did not rise but fell slightly, with overnight rates around 1.40%, and 7-day rates also remaining steady, indicating ample liquidity. Long-term interest rates, however, continued to fluctuate weakly. The current 10-year government bond yield is above 1.83%, up from the lows seen in early February.

“The bond market has shifted from a one-sided trend to a sideways pattern,” said Tan Yiming, Chief Fixed Income Analyst at Tianfeng Securities, in an interview with Shanghai Securities News. “Short-term rates are supported by liquidity, while long-term rates are suppressed by improving economic data and inflation expectations.”

From a trading perspective, market participation structures are changing. Lyu Pin, Chief Fixed Income Analyst at Zhongtai Securities, told Shanghai Securities News that since the “debt shortage” began in February last year, the bond market has been operating for about a year, and the current phase is nearing its end. Influenced by rising inflation expectations and improving economic data, the bond market lacks clear bullish drivers. “Trading funds are gradually exiting long-term bonds, with some institutions shifting toward options and secondary bond funds, leading to a noticeable decline in active long-bond trading.”

Liquidity Support to Hedge Shocks

Despite increased volatility in equity markets, the bond market remains stable overall, primarily due to a steady liquidity environment.

A report from Huaxi Securities shows that during the tax period, the central bank maintained regular liquidity injections, resulting in a self-balancing liquidity situation. Overnight and 7-day rates saw limited fluctuations, and cross-season funding rates rose less than historical averages, reflecting manageable overall liquidity pressure.

“Stable liquidity is key to maintaining resilience in short-term interest rates,” Tan Yiming said. Under expectations of lower interbank deposit rates, the interbank certificate of deposit market performed strongly, further stabilizing short-term rates.

In this context, the reallocation of funds between stocks and bonds has begun to manifest. A proprietary trader at a securities firm told Shanghai Securities News that as A-shares declined, risk appetite decreased, prompting some funds to temporarily flow back into bonds, supporting short-term rates. However, the phase evolution shows that previous rebounds in equities once suppressed bond performance, and the “tug-of-war” effect between stocks and bonds continues to switch back and forth. “Currently, bond market movements are mainly disturbed by inflation and macro fundamentals. On one hand, rising oil prices accelerate PPI turning positive, heating up inflation trades; on the other hand, improved export and investment data weaken the attractiveness of bond assets.”

A report from Huatai Securities suggests that although overseas market volatility impacts through channels like inflation, policy, and capital flows, the trend of Chinese bonds remains primarily driven by domestic fundamentals and monetary policy, with overall fluctuations being relatively controllable.

Focus on Interest Rate Ranges and Structural Opportunities

Looking ahead, most institutions believe the bond market will continue to fluctuate within a range.

Tan Yiming said that the market has yet to form a consensus for a bullish outlook, with trading mainly characterized by quick in-and-out moves. The pace of allocation has slowed, and the “easy to fall, hard to rise” feature of long-term rates is expected to persist. In the short term, inflation expectations may still disturb market sentiment, with the 10-year government bond yield possibly rising to 1.85%.

However, from a medium-term perspective, the upward momentum may weaken. “Current interest rate levels already partly reflect macroeconomic recovery and inflation expectations,” Tan added.

Huatai Securities recommends that if the 10-year government bond yield enters the 1.85% to 1.90% range, traders can moderately seize trading opportunities. For allocations, short- to medium-term credit bonds are suggested as core holdings, with long-term rate bonds mainly for tactical trading.

Guotai Haitong Securities’ report notes that amid recurring geopolitical conflicts and inflation expectations, global asset prices are increasingly correlated, making the bond market less independent. While inflation-driven trades are becoming neutral for ultra-long-term rates, in environments with high uncertainty, long-term positions—whether long or short—face significant volatility risks.