After issuing a warning and issuing fines, the central bank will further tighten control over the bond market, suspending the purchase of national bonds to stabilize expectations. The probability of a reserve requirement ratio cut in the first quarter is expected to increase.

The central bank today announced that, due to the continuous supply shortage in the government bond market in recent times, the central bank has decided to suspend open market purchases of government bonds starting from January 2025, and will resume based on the supply and demand situation in the government bond market. Experts point out that this means that after repeatedly warning about risks and issuing fines for violations in the bond market, the central bank has escalated its control over the bond market to curb the trend of the bond market "running ahead" and stabilizing market expectations. Experts also note that the central bank's announcement to suspend government bond purchases will help balance the supply and demand relationship in the government bond market. If long-term bond yields rise to reasonable levels later on, the central bank may resume purchasing government bonds. Following the central bank's suspension of bond purchases, the 10-year government bond yield may experience a significant increase in the short term, and the probability of a reserve requirement cut in the first quarter is also rising. From a direct impact perspective, Feng Lin, executive director of the research and development department at Orient Securities, stated that the central bank's suspension of purchasing government bonds will reduce the demand for government bonds, while not ruling out the possibility of the central bank selling long-term bonds during the suspension period to adjust the supply and demand relationship in the bond market. "This means that after repeatedly warning about risks and taking corresponding regulatory measures, the central bank has escalated its control measures over the bond market, aiming to curb the rapid downward trend of bond yields in the recent period, stabilize market expectations, and help stabilize the yuan exchange rate," Feng Lin added. In recent times, the central bank has tightened its supervision over the bond market, not only summoning a group of financial institutions that have engaged in aggressive trading in this round of the bond market, but also publicly issuing fines for violations in the bond market. On December 30, 2024, the central bank announced the first batch of penalties for bond market violations, with 3 institutions collectively fined approximately 68.8098 million yuan for violating regulations of the interbank bond market and failing to fulfill customer identification obligations as required. At the same time, the central bank also seized nearly 9 million yuan in illegal gains. The reasons for the penalties were all violations of regulations in the interbank bond market and failure to fulfill customer identification obligations as required. Dong Ximiao, chief researcher at Zhongan Union, stated that influenced by factors such as economic downturn, effective funding demand has been insufficient in recent years, resulting in a certain degree of "asset shortage," with some small and medium-sized financial institutions finding it difficult to effectively allocate credit. On the other hand, market credit risks have increased, putting more pressure on the asset quality of financial institutions. Some commercial banks, including rural commercial banks, have expanded their bond investments, with "large banks lending while small banks buying bonds," and bond investments have become an important source of income for banks. Government bonds, backed by national credit, have strong security and have become an important choice for financial institutions' asset allocation, resulting in a shortage of supply. Meanwhile, since 2024, long-term bond yields in China have been notably declining, reaching new lows in recent times. In this situation, the central bank's announcement to suspend government bond purchases will help balance the supply and demand relationship in the government bond market. "The purchase of government bonds is an important way for the central bank to inject liquidity, but suspending government bond purchases does not mean a tightening of liquidity in the market," Dong Ximiao predicted. In the next step, the central bank will continue to inject short-term and long-term funds into the market through open market operations and by lowering the reserve requirement ratio to maintain ample market liquidity. "In the future, if the supply of government bonds increases substantially, and long-term bond yields rise to reasonable levels, the market supply and demand relationship may naturally balance out, and the central bank may resume buying government bonds to continue playing its role in injecting medium- and long-term liquidity into the market through net purchases of government bonds," Feng Lin stated. Looking ahead to 2025, analyst Qu Rui from Orient Securities stated that they are still bullish on the bond market trends for 2025. In fact, the market expects a downward trend in bond rates for 2025, which fueled institutional year-end rush to allocate. The current market confusion lies in the fluctuation space and pace of the rates in 2025. In early trading today, the yield of major interbank interest rate bonds increased, with the 10-year China Development Bank "24 China Development 15" bond yield rising by 3.5 basis points to 1.70%, the 10-year government bond "24 Interest-bearing National Debt 11" yield increasing by 3.5 basis points to 1.66%, and the 30-year government bond "24 Special National Debt 06" yield rising by 3.5 basis points to 1.93%. Feng Lin also pointed out that, influenced by the central bank's suspension of government bond purchases, the yield on 10-year government bonds may experience a significant increase in the short term. However, under the backdrop of a "moderately loose" monetary policy tone this year, the broader trend of the bond market is unlikely to undergo a fundamental reversal. Lastly, it is worth mentioning that the suspension of government bond purchases may indicate an increasing probability of a reserve requirement cut in the first quarter. This article is a reprint from Caijing, edited by Chen Wenfang.