(Yicai) April 23 -- Chinese government bonds have been on the rise, with ultra-long-term treasury bond futures hitting the highest level of the year. However, analysts are becoming more prudent in their future outlook.

The main 30-year Chinese government bond contract yesterday closed up 0.4 percent at CNY114.18 (USD16.73), after hitting CNY114.37 during trading hours, the highest since the beginning of the year. Meanwhile, the 10-year, five-year, and two-year ones rose 0.09 percent to CNY108.84, 0.07 percent to CNY106.27, and 0.04 percent to CNY102.60, respectively.

Analysts attribute these increases to the loose monetary conditions. They believe the liquidity situation will remain a key variable driving the future trend of the bond market.

The yield on the 30-year government bond ‘26 Interest-Bearing Treasury Bond 02’ dropped 1.95 basis points to 2.2135 percent in the spot bond market in after-hours trading as of 6 p.m. yesterday. That on the 10-year government bond ‘26 Interest-Bearing Treasury Bond 05’ fell 1.2 bps to 1.731 percent.

The continuous decline in funds’ interest rates has further dragged short-term rates down, said Liu Yu, a fixed income analyst at Huaxi Securities. Moreover, in an ultra-loose monetary policy environment, non-bank institutions have abundant funds, providing an excess buying force for the bond market.

Institutions have started to exercise caution, given the overall optimism. Zhang Jiqiang, a fixed income analyst at Huatai Securities, recently suggested to gradually return to a neutral stance starting this week, take profit for the 10-year treasury bonds, and stop buying high for the 30-year ones.

Fund prices have accelerated their decline since early this month. DR001 -- the overnight interbank repurchase rate for depository institutions -- has remained below 1.23 percent. It closed at 1.2181 percent yesterday, after plunging to as low as 1.1 percent.

DR001 is low because cash is flowing back to the banking system after the Chinese New Year holiday, liquidity demand shrank at the beginning of the quarter, banks’ foreign-exchange settlements and sales balance are expanding, and fiscal spending is accelerating, said Zhang Xu, chief fixed income analyst at Everbright Securities.

From the perspective of the central bank’s regulation and other factors, DR001 has a tendency to rise steadily, Zhang noted, adding that before the Labor Day holiday, demand for base money in the banking system will grow.

The central bank’s decision-making is based on domestic financing needs, and there is no basis for tightening at the moment, so even if the Strait of Hormuz reopens, the impact on liquidity may be limited, said Sun Binbin, chief fixed income analyst at Caitong Securities. Moreover, the issuance of special treasury bonds is about to start.

Funds’ interest rate will remain low and fluctuate, so the yields of 30-year and 10-year treasury bonds will likely fall below 2.15 percent and 1.7 percent, respectively, Sun predicted.

Editor: Futura Costaglione