How to view and respond to the central bank's restart of government bond trading?

Event: On October 27, 2025, the central bank governor stated at the 2025 Financial Street Forum Annual Meeting that "the bond market is operating well overall and will resume open market operations for government bonds."

Core Viewpoints: Two major considerations, two details; short-term benefits for the bond market, closely monitor the actual scale of government bond purchases, and also keep an eye on whether there will be further reserve requirement ratio cuts or interest rate reductions within the year.

1. Objectively, the central bank's resumption of government bond trading reflects the strengthening of the synergy between fiscal and monetary policies, which also helps stabilize interest rates and expectations; at the same time, the adjustment of long-term government bond yields and the alleviation of the inversion degree between short-term government bonds and funding rates provide a favorable interest rate environment for the resumption of government bond trading.

2. In terms of operations, two details are mainly focused on: first, in terms of scale, considering the issuance of government bonds, coupled with the maturity of MLF and reverse repos, there remains a certain liquidity gap within the year, and the scale of the central bank's open market purchases of government bonds may exceed expectations, which still needs to be assessed in conjunction with the scale of MLF and reverse repos; second, in terms of operation duration, it is expected that the central bank will mainly focus on "buying short" and will not "sell long," with little likelihood of "buying long."

3. For assets, the central bank's resumption of government bond trading is a short-term benefit for the bond market, closely monitor the actual scale of government bond purchases by the central bank in the future; in the medium term, the bond market trend depends on three major factors: the fundamentals of real estate, exports, inflation, the "seesaw" between stocks and bonds, and the central bank's policy orientation, among which: it is inclined to believe that monetary easing is still the general direction, and there is still a possibility of reserve requirement ratio cuts and interest rate reductions within the year.

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1. Looking back, at the beginning of the year, the central bank suspended open market operations for government bonds mainly due to the rapid decline in interest rates, which also helps stabilize the exchange rate. In August last year, the central bank "carried out open market operations for government bonds to implement the relevant requirements of the Central Financial Work Conference," which subsequently became an important tool for liquidity injection. However, at the beginning of this year, the central bank suspended open market operations for government bonds, with the direct reason given in the announcement being "the government bond market continues to experience supply shortages." In fact, at the beginning of the year, due to weak fundamental expectations, the reduction of deposit rates exacerbated the "asset shortage," and institutions rushed to take advantage of monetary easing, leading to a rapid decline in interest rates, with the 10Y government bond yield dropping to around 1.6%. The risk of rapid interest rate decline continued to accumulate. At the same time, the rapid decline in interest rates led to an expansion of the China-U.S. interest rate spread, increasing exchange rate pressure, with the offshore RMB exchange rate rising above 7.35 at one point, and the central bank's suspension of government bond trading helped stabilize the exchange rate.

2. In this instance, the central bank's resumption of government bond trading reflects the strengthening of the synergy between fiscal and monetary policies, which also helps stabilize interest rates and expectations. At the same time, the adjustment of long-term government bond yields and the alleviation of the inversion degree between short-term government bonds and funding rates also provide a favorable interest rate environment for the resumption of government bond trading.

The main purpose of this resumption of government bond trading is still to strengthen the synergy between fiscal and monetary policies, and there has been some "preview" beforehand. Since March, due to fluctuations in the interest rate market, the issuance of government bonds in the primary market, especially long-term government bonds, has experienced a "flying issuance" phenomenon. Therefore, this resumption of government bond trading reflects the synergy between fiscal and monetary policies and also facilitates the smooth issuance of government bonds. In fact, at the second head meeting of the joint working group of the Ministry of Finance and the People's Bank of China held on September 3, it was already clearly stated that "in-depth discussions were held on topics such as the central bank's government bond trading operations." Recently, factors such as the strengthening stock market and the reform of fund rates have increased the adjustment pressure on the bond market. The central bank's resumption of government bond trading also considers stabilizing interest rates. Since July, the stock market has shown significant strength, and the "seesaw" effect between stocks and bonds has become apparent, coupled with the reform of public fund rates, leading to a fluctuation in bond yields. The 10-year government bond yield has risen to around 1.85%, up nearly 25 basis points from the low at the beginning of the year, while the 30-year government bond yield has even approached 2.3%. Against this backdrop, the central bank's resumption of government bond trading can release a signal of easing, helping to stabilize market expectations and avoid the "stampede" risk that further adjustments in bonds may trigger.

The rise in long-term government bond yields and the alleviation of the inversion between short-term government bonds and funding rates also provide a favorable interest rate environment for the resumption of government bond trading. As mentioned earlier, the current 10-year government bond yield has clearly adjusted, releasing the risk of interest rates declining too quickly, and the phenomenon of inversion between short-term government bond yields and funding rates has also improved, providing a good interest rate environment for the resumption of government bond trading.

From an operational perspective, two key details should be noted: first, in terms of scale, considering the issuance of government bonds, along with the maturity of MLF and reverse repos, there remains a certain liquidity gap within the year. The scale of the central bank's open market purchases of government bonds may exceed expectations, which still needs to be assessed in conjunction with the scale of MLF and the continuation of reverse repos; second, regarding the duration of operations, it is expected that the central bank will mainly focus on "buying short" and will not "sell long," with little likelihood of "buying long."

In terms of operational scale, net purchases remain the main direction. Considering the issuance of government bonds, along with the maturity of MLF and reverse repos, there remains a certain liquidity gap within the year, and the short-term buying scale may exceed expectations. Since July, the issuance of government bonds has accelerated, but as of October 27, the scale of government bonds yet to be issued remains around 1.7 trillion. Meanwhile, the maturity scale of MLF in November-December is about 1.2 trillion, and reverse repos will also mature 2.4 trillion, totaling a maturity scale of 3.6 trillion. Therefore, there remains a certain liquidity gap overall within the year, and the scale of the central bank's open market purchases of government bonds may exceed expectations, which needs to be determined in conjunction with the scale of MLF and the continuation of reverse repos.

Regarding the duration of operations, it is expected that the focus will still be on directly "buying short" and will not "sell long," with little likelihood of "buying long." Last year, the central bank's open market trading of government bonds had two operational modes in terms of duration: one was directly "buying short," and the other was "buying short and selling long." Compared to the former, the main purpose of the latter "selling long" is to adjust the shape of the interest rate curve while injecting liquidity. However, the current shape of the interest rate curve is relatively reasonable, and there is little necessity to adjust the shape of the interest rate curve through "selling long." There has also been market discussion about whether the duration of government bond trading will be extended; we tend to believe that the likelihood is low for two main reasons: first, from the perspective of returns, short-duration varieties are easier to manage in terms of gains and losses, avoiding significant losses during the trading of government bonds; second, from the perspective of policy flexibility, short-term liquidity injections are also more conducive to the central bank's adjustment of liquidity injection pace 4. In terms of assets, the central bank's resumption of open market government bond transactions is a short-term positive for the bond market. Focus on the actual scale of government bonds purchased by the central bank in the open market. In the medium term, stock market performance and fundamentals remain key. The central bank's resumption of government bond purchases will directly increase bond demand, which is favorable for the market in the short term. After the announcement, the yield on the 10-year government bond has fallen by 4.25 basis points to below 1.8%, while the yield on the 30-year government bond has decreased even more. Going forward, pay close attention to the actual scale of government bonds purchased by the central bank in the open market. In the medium term, the trend of bonds depends on three major factors: the fundamentals of real estate, exports, and inflation, the "seesaw" between stocks and bonds, and the central bank's policy orientation.

1. Looking ahead, monetary easing remains the general direction, and there is still the possibility of reserve requirement ratio cuts and interest rate reductions within the year. The trends in fundamentals such as real estate and exports are key variables determining the pace and magnitude of interest rate cuts. Combined with data since August showing that PMI has consistently remained below the threshold, prices are persistently weak, credit and social financing are relatively weak, consumption is sluggish, and investment growth is retreating from high levels, there are signs that the current economic downturn is accelerating, increasing the necessity and possibility of "timely policy support." The central bank's Q3 monetary policy meeting continues to emphasize easing while stressing implementation, indicating that reserve requirement ratio cuts and interest rate reductions remain options for policy within the year, with the trends of relevant fundamental indicators in real estate and exports being key variables determining the pace and magnitude of interest rate cuts.

Author of this article: Xiong Yuan, Mu Renwen, Source: Xiong Yuan Observation, Original title: "How to view and respond to the central bank's resumption of government bond transactions? [Guosheng Macro Xiong Yuan Team]"

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