The "pricing power of the bond market" has changed

Shenwan Hongyuan believes that the pricing power of China's bond market is undergoing a profound shift.

On December 15, the Huang Weiping team from Shenwan Hongyuan published a research report, pointing out that despite the marginal decline in domestic economic data since October and the resumption of bond purchases by the central bank, the decline in bond yields has been quite limited, indicating that the market has exhausted its positive factors.

Shenwan Hongyuan believes that this reflects a shift in the pricing power of long-term and ultra-long-term bonds from trading accounts to allocation accounts.

The report emphasizes that the traditional strategy of extending duration to obtain capital gains has become significantly more difficult, and different types of institutions need to adjust their operational thinking—trading funds should shift to medium- and short-term interest rate arbitrage strategies with leverage, while allocation funds need to patiently wait for buying opportunities brought by the entry of insurance funds, and those trapped since the beginning of the year should seize rebound opportunities to gradually reduce their positions.

The Macro Logic of Pricing Power Shift

Shenwan Hongyuan points out that the pricing power of the bond market is experiencing its first significant reversal since 2022.

Before 2022, 30-year government bonds were not mainstream, and the pricing power of long-term and ultra-long-term bonds was firmly in the hands of allocation accounts.

However, after 2022, with the transition of old and new growth drivers, intensified credit contraction, and deepening expectations of price stagnation, extending duration became the mainstream strategy in the market. A large number of medium- and long-term bond funds were issued, coupled with deep participation from trading institutions, leading to a gradual dominance of trading accounts in bond market pricing power.

Entering 2025, the market environment is undergoing fundamental changes again.

The central bank's cuts in reserve requirements and interest rates remain restrained, and new macro narratives are forming, such as anti-involution boosting prices, asset allocation rebalancing due to deposit migration, and alleviation of asset scarcity pressures.

It is particularly noteworthy that the "Regulations on the Management of Sales Expenses for Publicly Raised Securities Investment Funds (Draft for Comments)" restricts funds from entering the bond market through bond funds, which further promotes the shift of pricing power of long-term and ultra-long-term bonds from trading accounts to allocation accounts.

Intensified Adjustment Pressure from Supply-Demand Mismatch

The report emphasizes that the supply-demand contradictions at the micro level are reinforcing this pricing power transition process.

The mismatch in the duration of domestic fiscal and monetary supply constitutes the primary contradiction.

Fiscal expansion has led to an increase in net bond supply and an extension of duration, but the long-term funds injected by the central bank are mainly concentrated in 3-month, 6-month buyout repos, and 1-year MLF. Shenwan Hongyuan believes that the financial system lacks a long-term, cheap, and stable source of liabilities.

The central bank's liquidity injection can ensure stability in the interest rate levels for 1 to 3 years, but interest rates for maturities over 3 years mainly rely on market mechanisms for guidance. In an environment with excessive supply, the volatility of long-duration assets is significantly amplified, making it notably more difficult for trading accounts to obtain capital gains from long-duration assets, while allocation accounts begin to gradually dominate long-term bond pricing.

Shenwan Hongyuan also points out that changes in the structure of buyer demand are equally critical.

Between 2022 and 2024, demand from "banks + insurance + trading accounts + public offerings" formed a resonance, and although supply was abundant, it did not constitute a major contradiction. However, the situation reversed in 2025: the marginal demand from insurance institutions weakened, banks passively took on more long-term bonds, trading accounts became trapped, and long-end demand became more fragile, significantly amplifying the supply-demand contradiction Research report analysis indicates that the digestion of long-term bond supply pressure relies either on modifying banks' △EVE indicators (which is unlikely in the short term) or requires long-term bond prices to fall below allocation value, prompting insurance institutions to increase their allocation efforts.

Strategy Differentiation Becomes the Theme

Therefore, the research report believes that the transfer of pricing power is reshaping the operational strategies of different types of funds—whoever has incremental liabilities dominates the pricing power.

Trading funds should focus on the behavior of wealth management institutions. In an environment where the central bank maintains stable and loose liquidity, the exchange rate is stable, and the scale of wealth management is expanding, the supply-demand imbalance of long-duration assets has little impact on medium and short-duration assets.

The difficulty for trading funds to obtain capital gains by extending duration is increasing, and it is recommended to shorten duration and adopt a strategy of leveraging through medium and short-duration arbitrage.

Allocation funds should focus on the behavior of insurance institutions. Currently, long-duration assets are entering a prolonged repricing process, and the term spread is facing reevaluation. Allocation funds can remain patient, waiting for the right timing for insurance funds to enter the market and looking for suitable buying points after adjustments.

Stuck positions should adopt a "sell on every rise" strategy. The decline in long-duration interest rates is constrained by multiple conditions, but pullbacks are relatively easy. Stuck positions from the beginning of the year should seize rebound opportunities to gradually switch positions, avoiding deep entrapment.

Shenwan Hongyuan believes that this transfer of pricing power marks a fundamental change in the investment logic of the bond market, and investors need to adjust their strategies in a timely manner to adapt to the new market landscape