Nomura: Exit Long 30-Year Bonds, Short 3-Year NIRS

Overview

This report analyzes the latest developments in China's interest rate market and proposes adjustments to trading strategies. Nomura notes that although market liquidity remains ample, the People's Bank of China (PBOC) has significantly accelerated its withdrawal of medium-to-long-term liquidity in May. Additionally, amid a broad global sell-off in yields, 30-year Chinese government bond yields face upward pressure. Consequently, the firm is closing its previously recommended long position in 30-year bonds and shifting to shorting June-3Y RMB interest rate swaps (NDIRS), betting on rising front-end rates and marginal liquidity tightening.

Core views

On liquidity: while short-term liquidity remains abundant, the PBOC’s policy stance has clearly shifted. Since May, the central bank has net withdrawn CNY 1 trillion in medium-to-long-term liquidity through 3-month and 6-month Operation Rate Instruments (ORRs). This has sharply reduced year-to-date cumulative liquidity injections to just CNY 290 billion—far below the May average of CNY 1.18 trillion observed between 2020 and 2025. Although the 7-day repo fixing rate declined in May, this was largely driven by seasonal factors and lingering effects from prior easing. Money market rates will eventually respond to the declining absolute level of liquidity, though this adjustment is expected to be gradual and slow. On rates and bond markets: 30-year Chinese government bond yields have recently failed to stay below 2.25%, currently trading around 2.2875%. While China’s rate trajectory remains somewhat insulated from global markets—due to weak domestic demand and extremely low odds of PBOC rate hikes—the global sell-off in yields, fueled by rising oil prices, inflation concerns, and expectations of fiscal expansion, has increased external upside risks. Moreover, fund inflows into 30-year bonds have slowed over the past two weeks; large banks and brokerages remain net sellers, while insurers have only begun modest buying. Given these balanced fundamentals and external pressures, the beta of 30-year bonds to global rates may rise. On trading strategy: based on the above assessment, Nomura is removing its prior recommendation to go long on 30-year bonds and instead suggests directly shorting June-3Y NIRS (with a nominal DV01 of approximately USD 2,000). This trade aims to capture front-end rate increases driven by liquidity tightening, with a confidence rating of 3/5.

Analysis framework

Nomura’s analytical framework follows a clear logic chain: 'liquidity tracking → rate transmission → asset allocation adjustment.' First, it quantifies net changes in medium-to-long-term liquidity by dissecting PBOC open market operations (OMOs), Medium-term Lending Facility (MLF), and Operation Rate Instruments (ORRs), revealing a significant increase in liquidity withdrawal in May. Second, combining historical seasonality (e.g., typical rate cuts in Q2, peak bond supply requiring liquidity support) with current macro fundamentals (weak domestic demand, early signs of property market recovery), it concludes that further policy rate cuts have limited room and market rates are due to revert toward their neutral levels. Finally, by comparing global bond trends with China’s relative independence—and vulnerability—it assesses external spillovers on long-end rates, leading to the recommendation to reduce duration exposure (shorten duration or short the front end).

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Liquidity Supply-Demand Analysis

  Analyzes the balance between central bank liquidity provision (supply) and market funding demand (e.g., tax payments, bond issuance) to gauge funding conditions. The report uses net PBOC injections/withdrawals to assess marginal liquidity changes.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Asset Beta Coefficient

  Measures an asset’s yield sensitivity to movements in the broader market or a benchmark. The report notes that 30-year bonds may exhibit higher beta to global rates, implying greater price sensitivity to international yield volatility.

• Fixed Income & Credit AnalysisSpread analysis

  Policy Rate vs. Market Rate Spread

  Tracks the spread between market benchmark rates (e.g., 7-day repo fixing) and the PBOC’s policy rate (e.g., 7-day OMO rate). A narrowing or inverted spread often signals marginal liquidity shifts or policy intent; the report uses this to assess the likelihood and scope of rate cuts.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• 30-Year Chinese Government Bond (260002.SS)

  Negatively Impacted / Reduce Position

  Weaknesses

  Exposed to global yield sell-offs; domestic buying momentum weakening

  Comparison

  Compared to short-end instruments, long-end bonds are becoming more sensitive to global macro factors

  Risks

  Unexpectedly strong global inflation or growth data driving overseas rates even higher

• June-3Y RMB Interest Rate Swap (NDIRS)

  Beneficiary / Short Position

  Strengths

  Directly benefits from front-end liquidity tightening and rising rates

  Comparison

  Compared to shorting cash bonds, swaps offer greater flexibility and cost control in expressing rate views

  Risks

  Unexpected large-scale PBOC liquidity injections or rate cuts

Key data

• Net Withdrawal of Medium-to-Long-Term Liquidity in MayCNY 1 trillionAchieved via 3-month and 6-month ORR operations
• Cumulative Liquidity Injection YTDCNY 290 billionAs of May, far below the 2020–2025 May average of CNY 1.18 trillion
• 30-Year Government Bond Yield2.2875%Code 260002.SS; recently failed to hold below 2.25%
• Spread Between 7-Day Repo Fixing and 7-Day OMO Rate-3bpMay average, first negative reading since May 2023
• DR001 Monthly Average1.27%So far in May, up from April’s 1.23%

Impact & implications

The report argues that as the PBOC adjusts its liquidity provision pace, money market rates will gradually reflect the declining absolute liquidity level, putting upward pressure on front-end rates. For bond investors, the cushion for long-end bonds—especially 30-year paper—has thinned, and contagion risk from global bond sell-offs has risen. Thus, holding large long-duration positions is no longer advisable. Shorting front-end interest rate swaps now offers a more favorable risk-reward profile.

Risks

• Sharp volatility in global rates causing outsized spillovers into China’s bond market
• Surprisingly strong domestic economic data shifting market expectations on fundamentals
• PBOC monetary operations deviating significantly from market expectations, e.g., unexpected large-scale easing

What to watch

• Actual issuance pace and scale of government bonds (central and local) from June to September
• Speed at which money market rates (e.g., DR007, NCD rates) respond to liquidity withdrawals
• Sustainability of property sales data and its impact on aggregate demand