Policies implemented, data strengthening, but why did interest rates break 2%?

GDP still above 4%, but government bond yields have broken 2%? On December 2nd (Monday), the yield on China's 10-year government bonds historically fell below 2%, officially entering the "1.0 era." The yield levels have never been reached during the 2008 financial crisis, the 2015-2016 stock market crash, or the 2020 pandemic. Chart: China's 10-Year Government Bond Yield (%) Long-term interest rates, as a barometer reflecting a country's long-term nominal growth expectations, should align with economic growth rates. However, in the third quarter of this year, China's actual GDP grew by 4.60% year-on-year, while nominal GDP grew by 4.04% year-on-year, resulting in a divergence of over 200 basis points between nominal growth and government bond yields! Chart: 10-Year Government Bond Yield vs. Nominal GDP Growth Rate Looking at the manufacturing PMI, China's manufacturing PMI stood above the boom-bust line for two consecutive months in October and November, also showing a divergence from the trend of government bond yields. Chart: 10-Year Government Bond Yield vs. Official Manufacturing PMI From a macro perspective, what factors may have led to this divergence? Liquidity easing is the "catalyst" for the break in interest rates The key reason triggering the fall of interest rates below 2% is widely believed to be liquidity easing. Since the second half of this year, after the MLF was changed to a month-end rollover, the overall funding cost at month-end has remained relatively stable. According to the central bank's announcement, in November this year, the central bank conducted a total of 800 billion yuan in reverse repos, net purchased 200 billion yuan in government bonds, and injected 900 billion yuan in MLF. During the same period, 1.45 trillion yuan in MLF matured, resulting in a net injection of 450 billion yuan in medium- and long-term funds for the month. In an environment of ample liquidity, the banking system is once again facing under-allocation pressure. On November 29th, the market interest rate pricing self-discipline mechanism released the "Interbank Deposit Initiative," prohibiting non-bank interbank deposits from manual interest supplementation Interbank deposits are the most important component of bank liabilities aside from deposits. According to the data from the third quarter report of listed banks in 2024, interbank deposits account for approximately 9% of total liabilities. A large amount of this funding has been quickly reallocated to alternative assets for interbank deposits—interbank certificates of deposit. Within three trading days, the one-year AAA interbank certificate of deposit interest rate fell significantly by 15 basis points and transmitted through term premiums to long-term bond rates. In addition to the impact of short-term interest rates, some fundamental factors are also guiding long-term interest rates