The recent fluctuations in the bond market exemplify the "equity-bond seesaw" effect, indicating a complex interplay between asset classes. On February 24, 2024, the 30-year government bond futures experienced a significant dip, opening lower and dropping more than 1.5% at one point during the trading day. The closing price reflected a downturn of 1.27%, marking a cumulative decline of over 4% from its previous high, bringing the bond’s price down to levels not expected until late 2024. This downward trend can largely be attributed to a tightening of liquidity in the market and a revival of investor risk appetite towards equities, thereby exerting pressure on bond performance.

The upward movement in yields for major bonds was notable, with the yields on the popular 30-year government bonds rising by 3.5 basis points to reach 1.95%. Similarly, the 10-year government bonds saw an increase of 3.75 basis points, bringing their yield to 1.765%. Shorter-term bonds, including the 7-year, 5-year, and 3-year, reflected similar upward trends in their yields. This shift indicated that while long-term rates are rapidly ascending, the short-end of the yield curve is relatively stable, showcasing a divergent response within the bond market.

The pressure on longer-duration bonds, like the 30-year and 10-year futures, was stark, as they suffered larger declines compared to the much milder downturn of just 0.02% for the 2-year bond futures. In fact, since the beginning of the year, there have been signals of adjustment in the prices of 2-year government bond futures, while the 30-year bond futures began a consistent decline from February 7, leading to the current cumulative decrease.

Analyzing the causes behind these market adjustments reveal that the persistent tightness in available capital has been a major factor. Analysts from CITIC Securities emphasized that the low performance of the bond market is significantly linked to these constricted liquidity conditions. The phenomenon of a bear flattening yield curve indicates a mismatch in bond responses, where longer-term bonds face selling pressure.

Furthermore, Zhongou Fund identified several contributing factors to the current adjustments in the bond market. Firstly, the interbank liquidity has continued to tighten since the beginning of the year, contradicting the usual post-holiday liquidity influx expected after the Spring Festival. Traditionally, market expectations center around a more lenient monetary policy following the central economic work conference, particularly with anticipations surrounding cuts to reserve requirements or interest rates this first quarter. However, pressure on the Renminbi exchange rate has hampered these expected measures, leaving interbank lending rates elevated even after the holiday season.

Secondly, the tightening liquidity has resulted in financial institutions facing increasing borrowing costs, leading to an inverted yield situation where the cost of funds is greater than the bond yields available. This inversion harms many non-bank entities, where the quick decline in bond yields over the past year does not match the ongoing rises in financing costs. If such a situation appears temporary, non-bank financial institutions might capitalize on capital gains to offset short-term disadvantages. However, should this inversion persist, it could lead to more significant financial issues.

Additionally, the return of the equity-bond seesaw dynamic has influenced investor behavior and risk appetite. The recent surge in technology stocks led by DeepSeek generated a "profit effect" in the equity markets, diverting investment away from bonds. Consequently, the scale of bank asset management funding has notably fallen short of seasonal patterns, resulting in decreased availability of funds to purchase bonds.

The key question arises: has the bond market reached a correction point? Analysts suggest that the pressure experienced currently may soon alleviate, but only time will tell. The fundamental issue confronting the bond market is whether liquidity can be loosened to allow for potential recovery.

In the short term, according to Zhongou Fund, the main dilemma lies in the status of interbank funding. Should liquidity remain strained, and mid-term funding costs continue to rise, vigilant attention must be paid to the risks posed by significant market adjustments, prompting asset managers to shorten duration as a defensive measure. In contrast, if liquidity eases following seasonal trends, there remains hope for self-managed bank portfolios and wealth management strategies to prosper.

Investors are encouraged to monitor the risk appetite trends following the 2025 Two Sessions meetings. A downturn in investor sentiment could herald renewed activity in the bond market. Furthermore, from a fundamental standpoint, Guohai Securities reports that January saw a surge in credit lending primarily supported by short-term loans and bill financing from enterprises, while the demand for household credit remains weak and requires a recovery approach.

Future economic indicators, such as GDP growth targets and deficit ratios accomplished at upcoming governmental meetings, will also shape policy intensity assessments. Guohai Securities indicates that should the economic data released mid-March show disappointing results, the People's Bank of China may adjust its monetary targets to focus on steady growth, potentially leading to softened control over liquidity and presenting new opportunities within the bond market.

Moreover, as significant refinancing bond issuances are anticipated in November and December of 2024, which could disrupt supply in the bond market, a proactive intervention strategy by the central bank could help maintain stability. If bond issuance accelerates while the central bank renews its bond-buying endeavors, the resultant easing of liquidity may create favorable conditions for buying bonds.