As year-end approaches, both equity and bond markets exhibit volatility, with bond investors keenly watching for potential opportunities amid falling interest rates. This report analyzes recent factors disrupting the bond market and provides an outlook for future trends.

Since Q4, mainland China and Hong Kong equities have cooled significantly due to weaker economic recovery momentum, institutional year-end portfolio adjustments, rising AI bubble concerns, and fading Fed rate-cut expectations. Both A-shares and H-shares have retreated, with risk appetite declining and defensive strategies prevailing. Consequently, equity markets' capital diversion from bonds has weakened, with household assets increasingly flowing into wealth management products rather than equities or equity funds, thereby boosting bond demand.

Despite reduced equity market pressure, bond performance remains subdued, with long-term yields rising over the past two weeks (excluding Friday). This stems primarily from institutional behavior: (1) delayed implementation of new fund fee regulations has created uncertainty, prompting preemptive selling; (2) banks are locking in year-end profits, favoring profit-taking over bargain-hunting. Additionally, Vanke's bond extension has triggered localized sentiment shocks, raising fears of liquidity-driven redemptions in bond funds.

However, these institutional impacts are transient rather than structural. With economic momentum slowing, further monetary easing appears necessary. Recent ample central bank liquidity injections, coupled with deposit growth outpacing loans and negative net NCD issuance, indicate robust bank funding. Some banks' year-end allocation needs also support bond demand.

In summary, bond market demand remains substantial, but participants await clearer signals before committing. Beyond resolving the aforementioned headwinds (fund regulations, bank profit-taking, property bond volatility), more explicit monetary easing could catalyze aggressive positioning. With growing economic headwinds, December's key policy meetings may signal intensified easing—especially given fiscal policy's already expansive stance (2025's 13% broad fiscal deficit ratio nears 2020 levels). Meanwhile, rising Fed rate-cut odds for December could create room for PBOC rate reductions. Once policy loosening becomes evident, bond yields will likely break downward.

Key charts illustrate: 1. Cooling A/H-share markets (Figures 1-5) 2. Institutional shifts toward shorter-duration bonds (Figures 6-7) 3. Strong deposit growth and weak loan demand sustaining bond allocations (Figures 8-12) 4. Negative NCD issuance reflecting abundant bank liquidity (Figure 12)

The report concludes that while bond demand fundamentals remain solid, market participants currently adopt a wait-and-see approach pending clearer policy direction. A decisive easing signal—potentially from December's policy meetings or PBOC action—could trigger the next leg of yield declines.