Guosheng Securities: Three Marginal Changes Support Post-Holiday Bond Market Strength
nashnova research
China's bond market rallied for three straight sessions after the National Day break. Guosheng Securities flags funding rates breaking below range, net CD redemptions, and low small-bank bond holdings as three shifts that could push the 10-year CGB yield toward 1.6%.
What floor did funding rates just break through?
Post-holiday DR001 — the overnight interbank lending rate, essentially the price banks pay to borrow cash for one day — fell to 1.28%, the lowest since late May and below the trading range that had held since June.
Two forces drove the drop: seasonal easing of funding demand after the holiday, and the PBOC's outright reverse-repo rollover of 200 billion yuan, actively injecting liquidity.
This means → the central bank's tolerance band for short-end rates may be widening. An implicit floor existed; prices have now fallen through it, and the PBOC has not pushed back.
In plain terms = if DR001 stays around 1.3% or lower, the anchor for short-term borrowing costs shifts down — and that drags the entire yield curve lower.
Why are certificates of deposit suddenly shrinking?
The CD market — certificates of deposit are short-term IOUs banks issue to raise funds — posted net redemptions for two consecutive weeks: 203.2 billion yuan the week before the holiday, 108.3 billion yuan the week after, ending the net-issuance trend that had prevailed since June.
This reflects easing quarter-end regulatory pressure: banks no longer need to issue CDs aggressively to shore up liabilities.
This means → less CD supply hitting the market → room for CD rates to fall. Guosheng projects Q4 CD rates could drop to around 1.4%.
Lower CD rates have a knock-on effect: they cut banks' funding costs → banks become more willing to buy bonds → indirect support for the entire bond market.
Why might smaller banks start buying bonds again?
Since Q2, small and mid-sized banks have been steadily selling down bond holdings. By August, their bond-holding growth had slowed to 4.9% year-on-year, far below the 18.0% posted by large banks. September figures are expected to be even lower.
In plain terms = smaller banks' bond positions are already very lean; there is limited room to cut further.
Heading into Q4, banks begin planning next year's asset allocation. With loan growth under pressure and a need to keep profits growing steadily, bonds may re-emerge as an allocation target.
This means → smaller banks could flip from being a source of selling pressure to becoming potential buyers. If funding conditions stay loose, this shift could push yields lower still.
How far could these three shifts take yields?
Guosheng's targets: 10-year CGB yield near 1.6%, 30-year CGB yield near 2.0%, Q4 CD rates near 1.4%.
The logic chain: funding rates drop → the short-end rate anchor shifts lower → CD rates follow → bank funding costs fall + smaller banks rebuild positions → the whole curve moves down.
Guosheng also cautions: whether these three shifts form sustained, reinforcing momentum will determine how far the rally extends. The call on smaller-bank restocking still needs confirmation from actual allocation data.
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