Nomura recommends going long 30-year Chinese government bonds, seeing further downside in long-end yields

Overview

This is a Nomura fixed-income strategy report on the China rates market, focusing on why funding conditions have been unusually loose since March, what factors could push funding rates higher later, and the trading opportunity in 30-year Chinese government bonds. The report argues that liquidity remains relatively loose for now, but further easing room is limited; on the long end, 30-year Chinese government bonds still appear to have relatively better upside.

Core views

The report's core views are: first, the recent easy funding environment has been driven by the PBoC's earlier net medium- to long-term injections, a downward trend in bank funding costs, and weak credit demand; second, the PBoC's recent OMO and ORR liquidity drainage looks more like a move to absorb excess liquidity while maintaining reasonable abundance, rather than a shift to a tighter policy stance; third, money-market rates are already close to the corridor floor, with the monthly average of DR007 already near the 7d OMO rate, so further downside is limited, but given a relatively firm renminbi, weak equity sentiment, and domestic growth pressure, funding rates are also unlikely to rebound sharply; fourth, 30-year Chinese government bonds are supported by easy liquidity, easing inflation concerns, and safe-haven demand, so long-end curve flattening may continue.

Analysis framework

The report assesses liquidity and long-end bond direction by combining the central bank's open market operations, net OMO/ORR injection and drainage, the spread between 7d repo fixing and the 7d OMO rate, the positioning of DR001 and DR007, government bond supply, market leverage, institutional bond buying and selling flows, and CGB curve performance. The trade idea uses a relative-value framework, pairing a long position in 30-year Chinese government bonds with pay Jun-IMM 3y NDIRS, and using a DV01 ratio to control risk exposure.

Methodology notes

• Fixed Income StrategyLiquidity Regime Framework

  Low funding rates coexist with net central bank liquidity drainage

  The report compares low 7d repo fixing, net OMO/ORR drainage, and past easy-liquidity episodes to judge that the PBoC is withdrawing excess liquidity rather than simply turning hawkish.

• Curve Trading10s30s CGB Curve Analysis

  Flattening of the long-end government bond curve

  The report uses the spread between 10-year and 30-year Chinese government bonds, fund buying behavior, and historical ranges to assess relative performance of 30-year bonds, and concludes that the 10s30s spread may test 42bp but is unlikely to break materially below 40bp.

• Trading ModelCHaRT

  China rates trading model signal

  The report notes that on 2026-04-10 CHaRT gave a 0.5 neutral signal on 1y NDIRS and a 0.4 mild receive signal on 5y NDIRS/10y CGB; the authors believe this move toward curve flattening is consistent with the model direction.

Asset mapping & comparison

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

• 30-year Chinese government bond 260002

  Core long position

  Strengths

  Supported by easy liquidity, easing inflation concerns, and safe-haven inflows, the 30-year tenor still has room to outperform other maturities.

  Weaknesses

  The 10s30s spread has already narrowed, and if inflation expectations or global yields rise again, further downside in yield will be limited.

  Comparison

  The report believes the 30-year CGB has more upside than other tenors; year to date in 2026, the 30-year yield is still up 1.5bp, while most other tenors are down 5-10bp.

  Risks

  Higher government bond supply, the PBoC guiding funding costs higher, and overly aggressive fund buying that triggers policy constraints.

• Jun-IMM 3y NDIRS

  Pay leg paired with the long 30-year CGB

  Strengths

  Front-end swap rates are seen as having an approximate ceiling, making this a relative-value hedge leg in the pair.

  Weaknesses

  If funding conditions become materially easier again, pay 3y NDIRS could come under pressure.

  Comparison

  The report exits the receive 1y NDIRS leg but keeps the pay 3y NDIRS leg and combines it with the 30-year CGB long.

  Risks

  Persistently low funding rates or renewed market bets on easing may push swap rates lower.

• Jun-IMM 1y NDIRS

  Exit from the original receive leg

  Strengths

  Previously used for a 1s3s steepener strategy.

  Weaknesses

  At around 1.490%, the report sees limited value in continuing to receive.

  Comparison

  Compared with continuing to hold the 1y receive leg, the report adjusts the portfolio toward a more curve-flattening stance.

  Risks

  If short-end rates fall further, exiting the receive 1y leg may forgo gains.

• Hong Kong Jun-10y interest rate trade

  DV01 ratio adjustment

  Strengths

  By changing the relative DV01 ratio from 1:0.5 to 1:0.75 versus the U.S., the net pay exposure is reduced.

  Weaknesses

  The view depends heavily on stable global rates and stable Chinese long-end yields.

  Comparison

  The original recommendation was pay Jun-10y versus 50% U.S., now adjusted to versus 75% U.S.

  Risks

  A renewed sharp move in global long-end yields or changes in Chinese long-end yields could affect hedging effectiveness.

Key data

• Net medium- to long-term liquidity injection by the PBoC in Jan-FebRMB2.05trnThe report sees this as one of the main sources of abundant funding conditions in March.
• 7d fixing low1.41%In April, it was only 1bp above the 1.40% 7d OMO rate, the lowest since mid-August 2022.
• March OMO short-term net drainageRMB890bnThe PBoC drained short-term liquidity net via daily OMO in March.
• Net short-term OMO drainage so far in AprilRMB746bnIn April, the PBoC's daily OMO injections fell to RMB0.5-2.0bn and it continued to drain liquidity net.
• Net ORR drainage in March and AprilRMB300bn eachIn March, RMB300bn was drained net via 3m and 6m ORR, and in April another RMB300bn was drained via 3m ORR.
• Outstanding OMO balanceRMB4.0bnAs of April 13, down sharply from RMB1.64trn at the end of February.
• Expected 7d repo fixing range1.40%-1.45%, around 1.50% during pressure periodsStays at a low level in normal periods; tax payments, government bond supply, and month-end funding demand may lift it temporarily.
• Projected average monthly net CGB and LGB supply for May-JuneRMB1.37trnHigher than RMB890bn in Jan-Apr and may become one factor tightening liquidity.
• Average daily repo trading volume so far in AprilRMB8.4trnHigher than RMB8.2trn in March, indicating relatively high market leverage.
• 30-year CGB trade idea260002, current 2.272%, implied target around 2.20%The report recommends initiating a long 30-year Chinese government bond, paired with pay Jun-IMM 3y NDIRS at DV01 1:1.

Impact & implications

In terms of investment implications, the report does not interpret the current easy liquidity as a strong signal for reserve-ratio cuts or rate cuts. Instead, it emphasizes that funding conditions will remain reasonably ample but are unlikely to fall much further. In this environment, short-end funding-rate trading has limited optionality, while long-end government bonds are more attractive thanks to easy liquidity, safe-haven flows, and curve flattening. If government bond supply rises, market leverage is too high, or onshore funds buy long-duration bonds too aggressively, the PBoC may guide funding costs higher temporarily, but the report expects 7d repo fixing to move only into the 1.50%-1.60% range.

Risks

• Government bond supply may rise significantly in May-June and the third quarter, pushing up funding demand and weighing on bond performance.
• Market leverage is relatively high; if daily repo trading volume keeps rising, the PBoC may guide funding costs higher.
• If onshore funds rapidly and materially increase holdings of long-end CGBs and PFBs, the central bank may constrain aggressive bond buying through liquidity operations.
• A renewed rise in inflation expectations, energy prices, or global yields could weaken the upside momentum of 30-year Chinese government bonds.
• The report argues that recent easy liquidity should not be overinterpreted as an imminent rate cut or reserve-ratio cut; if the market prices in too much easing, a correction may follow.

What to watch

• The release of 2026 first-quarter GDP data.
• The April 6m ORR announcement.
• The 2026 CGSB issuance plan, especially arrangements for bank capital replenishment and ultra-long maturities.
• Whether the spread between 7d repo fixing and the 7d OMO rate stays around 5-10bp.
• Whether daily repo trading volume and market leverage remain above RMB8trn.
• The speed and scale of fund buying of long-end CGBs and PFBs.