The pressure of "asset shortage" remains unresolved. As 2025 draws to a close, market attention has turned to whether banks might sell bonds to lock in profits and boost departmental performance, potentially triggering bond market volatility. Multiple institutional analysts noted that banks' bond operations this year have stabilized significantly, with limited actual impact on the market. This reflects the persistent "asset shortage" pressure on banks' balance sheets and their continued strong demand for bond allocations.

**Reduced Selling Pressure, Sustained Allocation Demand** Recently, some market participants expressed concerns about potential disruptions from banks selling bonds to realize gains at year-end. Industry insiders pointed out that year-end is typically a period for banks to meet performance targets, and concentrated bond sales could lead to short-term interest rate fluctuations.

"The key concern is whether bank bond sales will drive bond yields sharply higher, even triggering secondary market adjustments," said a trader from a major state-owned bank. However, he noted that such behavior has notably stabilized: on one hand, bond market volatility in the first three quarters has narrowed unrealized gains, with some banks even reporting negative fair value changes; on the other hand, weak credit demand and ongoing "asset shortage" pressures have led banks to prefer increasing bond allocations over large-scale sales.

Ming Ming, Chief Economist at CITIC Securities, highlighted two primary motivations for year-end bond sales by banks: ensuring stable profit growth at the headquarters level and meeting departmental performance targets. However, based on listed banks' financial reports, the rising proportion of bonds in OCI accounts and ample holdings of older bonds have limited banks' year-end selling pressure.

Zhao Zenghui’s fixed-income team at Changjiang Securities believes bond allocations will continue to support balance sheet expansion. From an asset deployment perspective, bank credit issuance typically weakens seasonally in Q4, freeing up funds for financial investments. Declining bank liability costs also create room for bond allocations. Additionally, if government bond issuance slows in Q4, banks may have more flexibility to actively allocate bonds in terms of scale and duration.

Data shows that as of November 18, the CSI Aggregate Bond Index rose only 0.52% over the past month, with low volatility and overall stable sentiment. The yield on the 10-year Treasury bond fluctuated around 1.8%, with a monthly range of about 3 basis points. High-grade credit bonds saw limited volatility, while lower-rated bonds, though slightly more volatile, remained controllable without systemic adjustment pressure.

"Continued liquidity injections by the central bank are the core factor behind low bond market volatility," said the state-owned bank analyst. Since November, the central bank has net injected over CNY 600 billion via reverse repos, keeping short-term rates between 1.45% and 1.52%, providing stable support for the bond market.

Meanwhile, institutional demand remains robust. Long-term investors like banks and insurers continue increasing allocations to rate bonds, with primary market bid-to-cover ratios staying high, underpinning the secondary market. Industry insiders noted that this allocation-driven dynamic is a key reason for the current low volatility.

**State-Owned Banks Continue Boosting Government Bond Holdings** In the first three quarters of 2025, listed banks' bond investments showed "scale expansion and structural optimization." According to financial reports and custody data, state-owned and city commercial banks led allocations, with many listed banks posting over 20% YoY growth in bond holdings, while smaller banks exceeded 15%.

"Our focus is on stable returns, with trading as a supplement," said a bond investment manager at a major bank. "We hold government and policy bank bonds long-term, with little short-term trading." Custody data showed commercial banks bought nearly CNY 500 billion in bonds in September alone, including CNY 700 billion in Treasuries, providing key support amid market adjustments.

Ma Zenghui’s team noted that financial investments' share of bank assets has risen, reaching 30.3% of total assets by mid-2025. Structurally, OCI accounts (combining trading and allocation purposes) are growing marginally, state-owned banks are increasing government bond holdings, and while their average duration remained flat in H1 2025, some accounts extended duration selectively.

However, smaller banks exhibit stronger trading tendencies, with some realizing gains by selling older bonds. City and rural commercial banks saw quarterly growth in trading assets of 26.80% and 71.62%, respectively. Yet, bond market volatility pressured overall trading profits. Among 42 listed banks, 31 reported negative fair value changes in the first three quarters, with China Merchants Bank, China Everbright Bank, and Huaxia Bank leading losses due to bond valuation declines from rising yields.

Kaiyuan Securities noted that joint-stock and city commercial banks may have stronger incentives to sell bonds for profit in Q4. Overall, listed banks' financial market income grew 5.34% YoY in the first three quarters of 2025, well below the 11.33% growth in 2024, leaving a significant gap to annual targets. State-owned banks performed relatively better, while joint-stock and city commercial banks remained in negative growth territory, facing greater pressure to sell bonds for year-end performance.

Jiang Peishan, fixed-income chief at Western Securities, highlighted that banks realized more gains in H1 2025 due to market volatility and profit pressures. Measured by OCI account investment income, listed banks realized 18.33% of unrealized gains in H1, up 6.18 percentage points QoQ, with rural commercial banks leading and joint-stock banks lagging. However, she cautioned that as earlier gains are exhausted, selling opportunities may shrink in H2.

**Low Volatility, High Allocation to Persist in Q4** Looking ahead, analysts expect continued low volatility and stable returns in Q4. Guotai Junan Securities’ fixed-income team forecasts the 10-year Treasury yield to fluctuate between 1.75% and 1.85%. Upside risks include year-end liquidity tightening, tax periods, and potential government bond issuance, while downside support stems from central bank bond operations, sustained bank demand, and uneven economic recovery.

Industry consensus is that banks will prioritize bond allocations in Q4, with state-owned banks accounting for over 60% of new allocations, focusing on government and policy bank bonds. Year-end performance pressures may prompt some banks to optimize portfolios by selling less liquid older bonds, but overall market impact should be manageable.

A city commercial bank investor said, "We may swap a few older bonds to stabilize returns and meet year-end targets." Ma Zenghui’s team added that while banks may realize some investment gains in Q4, the impact on bond yields should be mild, though it could slightly dampen market recovery momentum.