Recent days have been tough for bond traders. On December 4, both stocks and bonds fell in early trading, with the bond market experiencing a sharper decline after prolonged weakness, particularly in ultra-long bonds.

The 30-year Treasury futures contract dropped over 1% intraday, marking its largest single-day decline in recent weeks. The yield on 30-year ultra-long bonds rose by 4 basis points (BP), with the yield on "25 Ultra-Long Special Treasury Bond 06" reaching around 2.28%.

Unlike previous bond market fluctuations driven by the "stock-bond seesaw" effect, the bond market has been steadily declining since Q4, with term spreads widening. Market participants noted that while the underwhelming central bank bond purchases—a key trading theme—have been digested by the market, persistent declines, weak buying interest, and profit-taking by institutions have created a negative feedback loop.

Many analysts believe short-term panic is inevitable, but the steep drop may leave room for a rebound later. In December, CNY 1 trillion in three-month reverse repos will mature. The central bank announced on December 4 that it would roll over the same amount on December 5.

**Term Spreads Widen Further** Despite generally loose liquidity conditions nearing year-end, the bond market’s prolonged decline worsened on December 4. By the close, Treasury futures were down across the board: the 30-year contract fell 1.04%, hitting a new low since November 22, 2024; the 10-year contract dropped 0.35%, the 5-year contract declined 0.24%, and the 2-year contract slipped 0.05%.

Yields on major interbank rate bonds rose broadly, with longer-term bonds seeing sharper increases and spreads widening further. The yield on the 10-year active bond "25 Coupon Treasury Bond 16" climbed 1.5 BP to 1.8525%, briefly touching 1.8625% intraday. The 30-year bond "25 Ultra-Long Special Treasury Bond 06" rose 2.4 BP to 2.26%, peaking at 2.2795% (+4 BP).

Over a longer horizon, the 10-year bond has erased all yield declines since the central bank resumed bond purchases in late October, while the 30-year yield has broken through key levels to hit yearly highs. The spread between 30-year and 10-year bonds now stands at around 43 BP.

Market participants highlighted two key themes in Q4: central bank bond transactions and new mutual fund redemption fee rules. Data released on December 2 showed the central bank’s net bond purchases in November totaled CNY 50 billion, up from CNY 20 billion in October but below expectations. While yields briefly stabilized post-announcement, the market remained weak on December 3, with most bonds trading flat.

**Who’s Selling?** "The main sellers are banks, with non-banks following suit," one trader noted. As year-end approaches, many institutions are locking in gains amid market volatility, but weak buying interest has fueled a downward spiral.

Analysts attribute the ultra-long bond sell-off to both strategic and tactical moves. Guosheng Securities fixed-income analyst Yang Yewei pointed out that banks face regulatory constraints on long-bond holdings, such as interest rate risk (ΔEVE) and capital adequacy ratios nearing limits, forcing them to sell long-duration bonds or realize gains. Meanwhile, mutual fund fee reforms may trigger redemptions, pressuring funds and brokerages to reduce exposure. Insurance firms, facing slower liability growth, have also shifted allocations toward equities.

Guohai Securities chief fixed-income analyst Yan Ziqi added that this year’s high supply of ultra-long bonds, combined with banks’ duration management and profit targets, has created negative feedback. Trading volumes for 10-year bonds have slumped, with funds and brokerages leading sales. "Mutual funds face uncertainty over redemption fees, while brokerages continue shorting 30-year bonds," he noted.

Huayuan Securities data showed that from November 20 to December 2, brokerages and bond funds net sold CNY 40.1 billion and CNY 22.1 billion, respectively, in ultra-long interbank bonds, while insurers net bought CNY 60.9 billion. Analyst Liao Zhiming attributed the yield spike to non-banks rapidly cutting duration amid expectations of limited capital gains.

**Supply-Demand Imbalance** Liao warned of persistent supply-demand pressure for ultra-long bonds, citing banks’ rising duration constraints, weaker insurance demand, and mutual fund reforms. He suggested the central bank may need to step up bond purchases to ease the strain.

Most institutions remain cautious on near-term bond market trends but optimistic long-term. Yang Yewei expects ultra-long spreads to stabilize as year-end pressures ease and demand recovers, though short-term risks—such as concentrated selling—persist. Liao Zhiming noted that while long-bond yields are at yearly highs, economic slowdowns could eventually prompt policy rate cuts, making long positions attractive.

Despite loose liquidity, monetary policy remains a key uncertainty. Markets have delayed expectations for rate cuts, focusing instead on alternative liquidity tools like bond purchases. On December 4, the central bank announced a CNY 1 trillion three-month reverse repo operation to maintain liquidity, matching maturities. Analysts speculate that year-end reserve requirement ratio (RRR) cuts could reduce medium-term liquidity injections.