Recently, the Chinese Ministry of Finance made headlines by announcing plans for the issuance of general government bonds and ultra-long special government bonds for the year 2024. The much-anticipated debut of these ultra-long special bonds took place on May 17, sparking substantial interest within financial circlesThis issuance marked a significant point of discussion, especially given the previously lingering concerns about the potential surging supply in the bond market.

Amid growing anxieties regarding the influx of bonds into the market, various stimulus policies aimed at the real estate sector have only added to the underlying pressuresHowever, the latest trading activities hint at a prevailing narrative of easing fearsFor instance, the yield on the “24 Interest-bearing treasury bonds 04,” a 10-year government bond, initially saw a rise of 2.04 basis points (BP) during the morning session, though it closed just marginally up at 2.3085%. Meanwhile, the more extended 30-year bond, identified as 230023, experienced fluctuations, peaking at 2.59% early last week but sliding back to 2.5725% by Monday’s close, yielding a slight 0.55 BP uptick from the day's open

In a surprising twist, the 30-year government bond exchange-traded fund (ETF) surged 0.31%, closing at 111.096.

In an interview, Cheng Hao, a fixed-income fund manager at Fidelity Fund Management (China), shed light on the implications of ultra-long special government bonds and their issuance timingHe highlighted that the unexpected aspect of the issuance window spans a notable seven months, from May to NovemberPrior market expectations leaned towards a concentrated issuance within the next couple of months, specifically during the second and third quartersThe resulting gradual rollout has eased up the pace significantly“In the bond market, we observed a noticeable downward trend in yields following the announcement of the issuance plan, primarily because the supply shock was less than anticipated, which mitigated overall market concerns,” he explained.

The worries regarding immediate supply in the bond market have been temporarily quelled

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The ultra-long special government bonds, part of a recent series, include 20-year, 30-year, and 50-year bond maturitiesThe first of these bonds launched on May 17, holding a maturity period of 30 yearsInitial apprehensions revolved around the expectation of increased bond supply in the second quarter, which could potentially disrupt the market.

Throughout the week leading up to the 17th, the yield curve for government bonds demonstrated a steep shift, with one-year yields declining by 10 BP to 1.61% and ten-year yields dropping 3 BP to 2.31%. This period also witnessed stock market fluctuations driven by the initiation of the ultra-long special government bonds along with intensified real estate easing policiesNotably, the ten-year and thirty-year bond yields settled at 2.3077% and 2.5867% respectively, reflecting decreases of 2.84 BP and 2.59 BP compared to the previous week’s close

This indicates that the introduction of the ultra-long special government bonds did not disrupt the overall bond market dynamic.

In secondary market trading, it was noted that brokerages engaged in a broad sell-off of various bond types, reducing their holdings and duration on bonds while shifting their purchasing focus towards credit bonds and certificates of depositGrassroots financial institutions alongside insurance companies proactively bought bonds, extending their durations, while wealth management products and other financial instruments bought bonds without extending their durationA consensus emerged among several institutions, suggesting the outlook for the bond market remains relatively worry-free.

Cheng Hao emphasized the guiding role of fiscal policy in this market transitionRecent data on social financing and the producer price index (PPI) reveal that China’s economy is undergoing an uneven transformation between old and new growth drivers

There remains a persistent need for internal demand to improve further as policy measures take effect, making the issuance of these special government bonds particularly crucial.

The issuance plan of these bonds has shifted market expectations, leading to decreased yields, owing to a recognition that supply shocks will not be as severe as previously fearedCheng noted that, while there’s a strong emphasis on policy coordination moving forward, the central bank is anticipated to maintain a stable yet accommodating monetary policy in conjunction with fiscal initiativesHad the issuance occurred within a tighter timeframe, as initially expected—within two to three months—net financing requirements would have surged, resulting in substantial yield upticks reminiscent of the elevated interest rates seen in the fourth quarter of the previous year and disrupting financial market stability.

Overall, institutions posit that the differentiated issuance schedule of special government bonds brings marginally positive implications for the bond market

This observation is corroborated by recent trends in bond market performance.

According to Wang Qiangsong, head of research at Nanyin Wealth Management, the bond market's trajectory has been chiefly shaped by the realities surrounding the special government bond issuance and the corresponding real estate policy implicationsIn April, there was considerable trepidation concerning the quantity of bond supply, yet the extended issuance timeline—from May through November—has considerably alleviated these supply pressures.

The issuance of ultra-long special government bonds is deemed necessary by various stakeholdersLian Ping, Chief Economist and Director at Guangkai Industry Research Institute articulated that these bonds aid local fiscal recuperationData from the Ministry of Finance indicates that by the end of 2023, national government debt totaled 70.77 trillion yuan, which comprises about 56.14% of the annual GDP—well below the internationally recognized threshold of 60%. Local government debt, however, has soared since 2015, growing by 155% up to 2023, while the fiscal pressures vary considerably across regions

Notably, in twelve provinces and municipalities with severe debt conditions, the debt-to-GDP ratio has alarmingly sourced beyond the 120% red flagA chunk of the recently issued 1 trillion yuan bond is allocated for transfer payments to local governments, significantly easing their fiscal burdens in the process.

The recent collective shift in real estate policies also draws notable attentionAmong the measures, the Chinese central bank, along with other government sectors, announced a comprehensive package aimed at augmenting housing demandThis included removing previously imposed limits on mortgage rates for first and second homes, lowering down payment requirements to 15% and 25%, respectively, and establishing a 300 billion yuan secured housing refinancing mechanismThe actions reflect a multi-pronged approach that encompasses stimulating existing housing market inventory, thereby exerting considerable influence on the real estate discourse.

Despite a period of tranquility observed in the 30-year government bond ETF, where prices have dropped nearly 4% since its April peak of 115.82, burgeoning expectations regarding central bank communications, real estate stimuli, and enhanced supply have contributed to this decline

Financial speculators in long-term bonds faced considerable difficulties in the wake of such price adjustmentsConversely, bullish sentiment propelled the Shanghai Composite Index past the 3100-point mark, and the Hang Seng Index experienced a remarkable rebound of over 25% from its lows.

Currently, the most intense waves of anticipated market repercussions appear to have subsidedWang noted that the bond market is not facing any immediate threatsHowever, challenges linger regarding the mismatch between wealth management offerings and subdued financing demandsMoving forward, bond market sentiment may hinge on evolving real estate activity, improved PPI figures, and a resurgence of external demandWhile the timing and pace of a recovery in real estate remain uncertain, the overarching direction is optimistic.

Industry insiders contend that the current bond market's stability is also attributable to the relatively unchanged expectations surrounding housing sales and price progression amid the backdrop of cooling real estate data