CITIC Securities posits that short-term variables influencing the yield curve trajectory may include equity market trends and policy signals, while long-term variables hinge on the validation of fundamental data robustness. The curve is anticipated to maintain a flattened profile in the near term, with a higher probability of a bull steepening scenario compared to bear steepening. A barbell strategy is recommended for short-term positioning, adjusting the allocation between long and short ends based on policy directions from upcoming key meetings.
Reviewing five episodes of curve flattening since 2013 reveals that bull flattening following accommodative monetary policy expectations and bear flattening during tightening cycles may subsequently transition into bear steepening. Under accommodative monetary cycles, reconfirmation of aggregate easing orientations could potentially trigger bull steepening. The analysis projects short-term influences from stock market movements and policy rhetoric, with long-term drivers tied to fundamental data verification. The curve is likely to persist flat near-term, favoring bull steepening over bear steepening. Short-term barbell strategies are advised, with long/short-end allocations calibrated to forthcoming policy meetings. Since 2025, persistent curve flattening has drawn market attention. Despite an inverted U-shaped adjustment in government bond rates this year, the 10-1 year term spread has largely fluctuated within a narrow 15-30 bps range. Amplified government bond supply in January-February 2025, coupled with restrained central bank liquidity injections, propelled short-end rates upward under funding pressures, driving significant flattening. The May interest rate and RRR cuts failed to reverse this trend, as the widening spread between 7-day rates and policy rates kept short-term rates resilient, sustaining the flattened curve structure. Historical analysis of five flattening episodes since 2013 yields these conclusions: 1) Bull flattening after accommodative policy realization may precede bear steepening amid improving fundamental expectations. The 2015 and 2019 cycles both transitioned from bull flattening to bear steepening, where short-end declines decelerated post-policy realization while long-end outperformed driven by risk aversion (stock crash, trade wars). The 2016 bear steepening accompanied real estate/credit easing expectations, while 2019’s emerged with rising inflation risks. Policy inflection points typically lead fundamental turning points, with subsequent data validation potentially catalyzing bear steepening. 2) Bear flattening during monetary tightening cycles, characterized by lagged long-end rate movements relative to short-end, often concludes with bear steepening. The 2013 and 2017 tightening phases saw bear flattening from short-end rate surges due to liquidity and monetary headwinds, with long-end reactions lagging. The 2013 curve experienced bull flattening under wealth management regulations, bear flattening during the liquidity crunch, then bear steepening with inflation pressures; 2017 witnessed bull flattening amid property tightening expectations and bear flattening under monetary pressure, eventually transitioning to bear steepening alongside commodity inflation and infrastructure expansion prospects.Overall, fundamental improvements (inflation and real estate expectations) under a tight monetary cycle may be the primary trigger for a shift from a flattening to a steepening yield curve.
During yield curve flattening driven by loose liquidity and unstable policy expectations, reconfirmation of broad monetary easing could trigger a bull steepening scenario. In 2023, despite a loose monetary stance, marginal tightening in operations limited short-term declines, contributing to flattening. Long-term rates were mainly influenced by real estate policies and shifts in market risk appetite, while short-term rates were more affected by fiscal factors. With the implementation of property market stimulus and credit easing tools, the late-November transition from bull flattening to bull steepening occurred due to: declining long-term rates (driven by sustained equity market weakness and underwhelming property stimulus effects) and firm short-term rates (supported by the central bank’s clear commitment to liquidity stability). Key considerations for future curve movements: – Fundamental risks (potential tariff impacts exceeding 2019 levels combined with a real estate downturn) may lack catalysts for sustained bear steepening dominated by long-term rate increases. – Stable liquidity conditions suggest continued curve flattening remains likely. – Monetary policy effectiveness (rate cuts/RRR reductions) requires verification. Renewed confirmation of easing could trigger short-term rate adjustments similar to late-2023. Near-term variables include equity market trends and policy signals, while long-term drivers depend on fundamental data validation. High-frequency data indicates the recent monetary easing has not yet generated supra-seasonal improvements in property or credit demand. We anticipate weak data initially reflecting in long-term rates, with policy responses lagging in short-term rates, potentially creating a bull flattening-to-steepening trajectory. Bond strategy: Adopt a barbell approach adjusting allocations based on upcoming policy meetings. Near-term data weakness poses limited risks, but watch the July Politburo meeting for monetary policy direction and potential property/credit measures. Maintain short-end exposure to hedge against equity volatility and external risks while retaining long-end positions given flattening potential. Authors: Ming Ming, Zhou Chenghua, Zhao Yi, Yu Jingwei Source: CITIC Securities Research Original Title: Bond Market Outlook | How Might the Yield Curve Evolve from Extreme Flattening? Risk Disclosure: Market risks exist, invest cautiously.This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situations, or needs of individual users.
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