Entering the fourth quarter, equity markets have started strongly, making the timing of when bond markets will stop declining a key focus of attention. Looking ahead to Q4, fund managers believe the bond market may present a "bull flattening" pattern, characterized by declining yields and curve flattening. In terms of investment strategy, emphasis should be placed on securing certain returns, prudently managing trading rhythms, closely monitoring marginal policy changes, and capturing structural opportunities.

**Three Factors Behind Bond Market Adjustments**

Range-bound volatility was the main theme for bond markets in the third quarter. Particularly in September, 30-year government bond yields rose approximately 10BP overall, with the interest rate curve showing significant bear steepening. Credit spreads widened, with credit bonds of 2+ years maturity generally rising more than 10BP.

From a market pricing logic perspective, fund manager Zhou Shuai from CINDA Australia Asset Management views September's bond market as primarily influenced by two factors. First, overall market risk appetite suppressed bond market performance. Risk assets represented by equities performed well, transmitting pressure to the bond market. Second, marginal changes in subsequent policy expectations occurred. In September, the central bank continuously nurtured liquidity with an overall loose funding environment, but market expectations that Q4 reserve requirement ratio cuts and interest rate reductions might coordinate with pro-growth policy implementation caused investor confidence in long-term bonds to waver.

He Chang, fund manager assistant and macro researcher at Industrial Bank Fund's fixed income department, believes that beyond risk appetite impacts, disruption from the draft consultation on new public fund sales regulations was also an important influencing factor for September's continued bond market adjustment.

"Affected by the new fund sales regulations, the market worried that bank wealth management and bank financial products would massively redeem bond funds, with pure bond wealth management products facing certain redemption pressure," supplemented a fixed income fund manager from Beijing.

**Bond Market Odds and Cost-Effectiveness Improving**

Regarding Q4 bond markets, fund managers believe disturbing factors still exist, but fundamental conditions do not support a trend toward bear market territory.

"Q4 bond markets are expected to improve compared to Q3, but will still face some uncertainty factors during the process," Zhou Shuai stated. The central bank may restart government bond purchases and apply policy tools such as reserve requirement ratio cuts and interest rate reductions at appropriate times, thereby bringing certain recovery opportunities to bond markets.

From a longer time horizon perspective, the central bank's "cost reduction" approach is more structural and targeted, while the necessity for actively promoting significant, further easing has somewhat converged.

"Regarding funding conditions, the overall tone remains inclined toward nurturing markets, but deposit 'migration' shows continuous signs, potentially affecting banks' bond allocation intensity. On the supply side, the Ministry of Finance proposed advancing partial issuance of 2026 additional local government debt limits and front-loading debt resolution quotas, suggesting government bond supply pressure may still be evident," he said.

Fund manager He Panpan from Dacheng Fund judges that Q4 domestic bond markets present both opportunities and challenges. Monetary policy easing expectations and fundamental conditions favor bond markets, but relatively low interest rate levels, potential supply pressure, and policy and economic uncertainties constrain yield downside space and may increase market volatility.

"The expected main fluctuation range for 10-year government bond yields is 1.65%-1.85%, with yield curve morphology possibly trending toward 'bull flattening' - long-end rates declining while short-end rates fall significantly due to funding volatility and policy rate guidance, leading to term spread narrowing," she said.

Looking forward, He Chang believes bond markets will primarily experience range-bound volatility in the short term. First, PMI has remained below the expansion-contraction line since April, and Q4 reserve requirement ratio cuts and interest rate reductions may coordinate with pro-growth policy implementation, with some expectation for central bank bond buying resumption by year-end. Second, during this market adjustment period, rural commercial banks and insurance companies significantly increased allocations, with ultra-long bond yield increases having a ceiling. Finally, the market has partially priced in the impact of sales regulations, and actual implementation may create allocation opportunities as negative factors are exhausted.

**Capturing Structural Opportunities**

Facing a bond market environment where volatility and structural opportunities coexist, interviewed institutions and fund managers suggest Q4 investment should primarily focus on carry, with appropriate caution on duration, while monitoring policy marginal changes and structural opportunities.

Regarding interest rate investment, HSBC Jintrust Fund indicates key focus on changes in macroeconomic policy, monetary policy implementation rhythm and magnitude. The probability of Q4 reserve requirement ratio cuts and interest rate reductions still exists, suggesting attention to opportunities brought by related policies.

Regarding credit investment, credit spreads continued compressing in Q3. Influenced by macroeconomic fundamental recovery, policy changes and other factors, Q4 credit bond markets still face risks of periodic adjustments, with key focus on short-to-medium duration credit bonds to capture returns with relatively high certainty.

Strategically, He Panpan suggests considering moderately extending duration, mining carry, flexible trading, while closely monitoring policy directions and funding changes to guard against potential risks.

"In volatile markets, the success rate is relatively high for timely positioning and profit-taking based on pricing ranges. Timing can be combined with seasonality and key events," Zhou Shuai stated frankly that Q4 bond markets still face many uncertainty factors, requiring comprehensive consideration of multiple factors in specific investments and formulating corresponding investment strategies by fully combining success rates with odds.

Full emphasis should be placed on certain returns, as market volatility probability remains high and bond carry income remains an important component. Trading rhythm needs careful management. Negative factors cannot be said to be fully priced, requiring close attention to further changes.

"Q4 presents some gaming space regarding reserve requirement ratio cuts, interest rate reductions and central bank operations, with pro-growth policy strengthening potentially facing uncertainties. Therefore, close attention must be paid to policy implementation rhythm and intensity, as well as seasonal funding disruptions, and the impact of stock market and exchange rate changes on bond markets," he said.

Ping An Fund analyzes that bond market odds have somewhat improved, with success rates focusing on right-side signals. Current fundamental conditions do not yet support a trend toward bond market bear territory. After the sharp decline since July, bond market odds and cost-effectiveness have improved. Short-term market trends depend on the ebb and flow between negative redemption feedback spiraling out of control and positive expectations of central bank market intervention. As the cross-quarter period ends, the former's potential risks gradually diminish, allowing gradual gaming of the latter's implementation possibility, focusing on right-side signals such as central bank bond buying resumption for stabilization.