The 2-year CGB yield briefly hit 1.51% yesterday for the first time since May, while the 10-year yield declined to 1.84%. The 2/10Y curve flattened from a recent peak of 47 bps in late September to 34 bps as of yesterday’s close. Several factors are likely to drive further curve flattening in the week ahead.
First, upcoming CGB issuance will be concentrated at the front to short end of the curve. According to the latest schedule, the Ministry of Finance will issue CNY 55 billion 6-month bills and CNY 127 billion 3-year bonds next week, totaling CNY 183 billion. This exceeds the planned CNY 149 billion issuance in 10-year bonds, suggesting greater supply pressure at the short end.
Second, China will release its 3Q GDP data and LPR decision on Monday. The market expects growth to slow from 5.2% YoY in 2Q to 4.7% in 3Q, broadly in line with our Nowcasting estimate of 4.8%. Major domestic demand indicators—such as fixed asset investment and industrial production—likely decelerated further amid the ongoing anti-involution campaign. Domestic consumption also remains subdued, as reflected by modest tourism activity during the National Holiday. Despite these headwinds, the PBoC is expected to keep the 1Y LPR unchanged at 3.00% next week to protect banks’ net interest margins (NIMs), while relying instead on open market operations (OMO) for liquidity injections.
Third, investors are closely watching developments in the China–U.S. trade negotiations. If a truce extension is reached, growth outlook could improve, prompting dip-buying in equities and offering some temporary support to long-end yields. However, any rebound is likely to be short-lived. Even under a truce, exporters may once again front-load shipments, adding downward pressure on both domestic and external prices. Notably, export value growth has lagged volume growth over the past three months, with a spread of –7.4 percentage points year-on-year. As such, the recent uptick in CPI and PPI largely reflects supply-side adjustments, offering little comfort for long-end yields, which should remain capped.
Fourth, Chinese policymakers will convene the Fourth Plenary Session of the 20th CPC Central Committee on 26–29 October to discuss the 15th Five-Year Plan. The medium-term GDP growth target is likely to be revised down from 5% to a range of 4.5–5%, with Beijing expected to emphasize productivity gains and innovation-driven growth. This growth model will rely less on leverage compared with traditional infrastructure and property-led investment. As a result, long-end bond issuance is expected to increase only moderately over the medium term.
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