In 2025, will the bond market go crazy again?

Remember 2024 The year 2024 has written a vivid chapter in the history of China's bond market. Throughout this year, the pace of the bull market has hardly ever paused. In the first half of the year, the main theme of market trading was the backdrop of asset panic, while by the end of the year, interest rates began to plunge again under expectations of interest rate cuts and reserve requirement ratio reductions. The yields on government bonds across various maturities "headed south," with the 10-year government bond yield declining by 90 basis points throughout the year. Looking ahead to 2025, will there still be a bull market in bonds? Is the interest rate cut pricing too sufficient? First, we can observe to what extent the market has priced in next year's interest rates by looking at the prices of interest rate swaps. In our country, there are nearly 100 varieties of interest rate swap contracts based on different maturities and types. However, in actual trading, only FR007 and SHIBOR 3M are the most active reference rate varieties. Interest rate swaps are essentially a combination of floating and fixed-rate bonds, but they can also be viewed as a combination of multiple forward rate agreements of different maturities. Since the pricing of interest rate swaps requires investors to make judgments about future discount rates, the prices of interest rate swaps can be seen as implicit expectations of future interest rates. Image: IRS interest rate swap cash flow diagram Historically, interest rate swaps have shown strong leading indicators for cash bond rates (especially at the short end). Image: Interest rate swap FR007 and 1-year government bond rate On this basis, we can observe the FR007 and Shibor3M yield curves to judge the implied number of interest rate cuts in the near future. Currently, both have basically priced in expectations of a 50 basis point interest rate cut for next year's short-term policy rates, with a tendency to complete this in the first half of the year. Image: Implied forward rates of FR007 and SHIBOR3M interest rate swaps In a state where interest rate cut expectations are "fully priced in," how much space is left for the bond yield curve? In 2025, will there still be a "lack of allocation" in bonds? This year's bond bull market has been significantly driven by the broad decline in interest rates. Firstly, the decrease in loan interest rates has led banks to "prefer bonds over loans." If we anchor the traditional banking business and the financial market business to measure their respective yield levels, we can set the former's anchor to operating loans and mortgage rates, while the latter is anchored to the 10-year government bond yield. Comparing their absolute levels at the end of 2023: The interest rates for banks' operating loans and real estate loans are generally around 3-3.5%, while the 10-year government bond yield is around 2.6%, resulting in a spread of about 0.5-1 percentage points between the two. However, considering the 5% non-performing rate for real estate loans and the 2% non-performing rate for operating loans, the actual yield from lending has been discounted