CITIC Securities | Focus on changes in the yield curve shape and structure

By: Zeng Yu Qu YuanYuan

From a mid-term perspective, the yield curve’s shape is expected to level off moderately. On the long end, the main negative factor is the inflation level. With indications of easing in the U.S.-Iran situation and with China’s import-driven inflation stabilization mechanism gradually taking effect, the strength of March inflation may be weaker than previously expected, providing a repair basis. On the short end, funds are somewhat grouping together; however, short-duration government bond yields have begun to fall below the funding cost. For allocation strategies that add leverage and carry on short-duration government bonds, returns have decreased, making valuation strength an important internal driver—for example, if the market’s risk appetite shifts, this kind of “grouping together” is prone to fall apart. Overall, the current yield curve’s steep shape lacks internal stability. Incremental information is likely to change the current curve structure. Factors such as March inflation data and easing in the U.S.-Iran conflict are potential triggers that should be kept under close watch.

Funding cost: March funding rates remain at a low level

The DR007 central rate remains around 1.45% in March, located in the middle of the interest-rate corridor and closer to the policy rate central rate. At the two sessions, the monetary policy side proposed to “facilitate the transmission mechanism of monetary policy.” Pan Gongsheng, Governor of the People’s Bank of China, also noted that in the future, the targets for quantitative intermediaries will be gradually de-emphasized. It is expected that the importance of the interest-rate corridor in the mechanism will increase, and the anchor effect of the 7-day OMO interest rate will be strengthened. In the near to mid-term, investment data for the real economy is still relatively weak; cash leakage in the banking system and pressure on loan disbursement are also low. At present, there is no sign of a system-wide surge in demand, and it is expected that funding cost will continue to run at a low level.

Bank negotiable certificates of deposit: Prices continue to move down

In March, banks’ active financing demand remains weak. At present, the term spread between short-term CDs and longer-term CDs has further compressed. For AAA-rated 1M CDs, the spread versus 1Y CDs is less than 10BP. Liquidity within the banking system is abundant, showing structural rather than phase-based characteristics. Looking ahead to April, under the anchoring of low funding costs, the prices of interbank CDs are also expected to find it difficult to move up. Observe whether the policy side has further measures to clear and improve the transmission mechanism of monetary policy. If there is no upside surprise, CD yields may still be expected to maintain a downward trend.

Interest-rate bond supply: No obvious pressure

It is expected that in April, the supply scale will also be hard to achieve any noticeable growth. Overall, interest-rate bond supply pressure remains limited. In terms of issuance progress, by the end of March, the completion rate of newly issued general local government bonds reached 32.5%, and the issuance progress of newly issued special local government bonds reached 26.6%; overall, this is slightly faster than last year. For Treasury bonds, by the end of March, the completion rate reached 18.6%, close to the average 17.4% over the past three years. Overall, the pace is not slow. Taken together, the current issuance rhythm of interest-rate bonds is moderate, and there is little need to accelerate issuance. It is expected that there will be no short-term supply shock to interest-rate bonds.

Institutional behavior: Defensive tendencies among trading-type institutions increase

Currently, the behavior of trading-type institutions is shifting toward defense. Funds show some “grouping together” on the short end, which matches the curve’s steepening characteristics in March, with short-duration bonds strengthening while long-duration bonds weaken. Small- and medium-sized banks have increased purchases of ultra-long maturities to some extent. The allocation strength of insurance firms is slightly weaker than last year. Regarding leverage, the estimated leverage-rate central level in March is about 107.2%, which remains stable but is slightly lower than last month.

I. Market review

1.1 Review of interest rate performance: Short end strong, long end weak; curve becomes steeper

In March 2025, the market showed divergence between the long and short ends. Yields on the short end moved clearly downward, while yields on the long end edged slightly upward, and the yield curve displayed a steepening trend. Under input-driven inflation expectations, risk appetite in the bond market became more cautious, and the shift of funds toward the short end is one of the key catalysts. In numerical terms, the month-end yields of Treasuries for 1Y, 3Y, 5Y, 7Y, 10Y, and 30Y were 1.22%, 1.31%, 1.54%, 1.67%, 1.82%, and 2.35%, respectively. Compared with the previous month, they changed by -9.6BP, -6.9BP, -0.4BP, 0.7BP, 4.2BP, and 7.9BP respectively. The short end strengthened markedly, while the long end and ultra-long end saw some adjustment.

In terms of trend, in March the long end of the market was weak first and then stabilized, while the short end continued to strengthen. The U.S. and Iran conflict is the main thread behind this market shift. This time, the conflict in the Middle East led to the closure of the Strait of Hormuz, which pushed up international oil prices. The market worried about input-driven inflation pressures, resulting in a small upward move in long-end Treasury yields. However, China’s refined oil price stabilization mechanism took effect quickly, and in terms of transmission channels, the structural impact of input-driven inflation on the bond market is controllable. As a result, overall adjustments on the long end of the 10Y market were limited. Domestically, the economic growth target for the “two sessions” in 2026 was lowered to the range of 4.5%-5%. Monetary policy maintained a tone of “moderately accommodative.” This year, the fiscal deficit has not been further increased, so the fundamentals of the economy and monetary policy also imposed constraints on the bond market’s yields moving systematically upward.

II. Liquidity tracking

2.1 Monetary injection: PBOC tightened slightly in March

Against the backdrop of withdrawing excess liquidity injected earlier and maintaining reasonably ample funding, the PBOC’s monetary injections in March were tightened somewhat. Cumulative net withdrawals totaled 1M yuan. Among them, reverse repos (7D) injected 1.04T yuan and matured 1.36T yuan; MLF injections were 500B yuan and maturities were 450B yuan; outright reverse repos (91D) injected 1T yuan and matured 500B yuan; outright reverse repos (182D) injected 600B yuan and matured 70B yuan. Treasury cash term deposits: 21-day term deposits of 700 billion yuan, maturing 1500 billion yuan for 1-month term deposits, and 150B yuan maturing for 3-month term deposits.

Overall, in March, liquidity injection decreased slightly, and funds were drawn back somewhat. On one hand, this operation aligns with the seasonal characteristic of lower monetary injection in the second quarter. On the other hand, it is related to the current lack of smooth transmission of the monetary policy mechanism, redundancy of funds within the financial system, and overall ample funding for financial institutions. Looking ahead to April, under the backdrop of a relatively steady issuance schedule for interest-rate bonds and limited pressure, liquidity injections are expected to remain somewhat tight.

2.2 Funding cost: Funding rates continue to drift lower in March

In March, funding costs were generally stable and maintained a slightly downward trend. DR001 and DR007 fell by 1.9BP and 5.3BP respectively, closing at 1.31% and 1.44%. R001 and R007 fell by 0.9BP and 4.9BP respectively, closing at 1.39% and 1.50%. GC001 and GC007 fell by 16.8BP and 8.6BP respectively, closing at 1.40% and 1.51%. The spread between R007 and DR007 widened by 0.4BP to 6.2BP. The tiering of funds is relatively stable, with no obvious widening in the non-bank spread.

Overall, the DR007 central rate in March remains around the 1.45% level, located in the middle of the interest-rate corridor and closer to the policy rate central rate. At the two sessions, the monetary policy side proposed to “facilitate the transmission mechanism of monetary policy.” From a long-term perspective, this reflects the need to squeeze redundant liquidity within the financial system. Governor Pan Gongsheng of the PBOC also pointed out that in the future, the PBOC will gradually de-emphasize targets for quantitative intermediaries and treat the total amount of finance more as an observable, reference, and forward-looking indicator—creating conditions to better play the role of interest-rate regulation. Taken together, in the future, the importance of the interest-rate corridor in the mechanism is expected to increase, and the anchor effect of the 7-day OMO interest rate will be enhanced. Looking ahead to April, with investment data in the real economy still relatively weak, cash leakage from the banking system and pressure on loan disbursement are both low. At present, there is no sign of a system-wide surge in demand. It is expected that in the short term, funding cost will continue to run at a low level.

2.3 Bank negotiable certificates of deposit: Interbank CD prices continue to move down in March

For CDs, in March interbank CDs were issued at 180B yuan, matured 246.49B yuan, and the net financing amount was -2464.9 billion yuan. The net financing scale was lower than the same period in 2025 and also below the average level from 2022 to 2024. On the price side, AAA-rated 1M, 3M, 6M, and 1Y CD maturity yields closed at 1.43%, 1.45%, 1.47%, and 1.51% respectively. Compared with the end of last month, they fell by 5.0BP, 10.8BP, 10.0BP, and 6.8BP respectively. The spread between AAA-rated 1M and 1Y CDs narrowed to 8.3BP.

Overall, CD rates at banks continued to move down in March, tracking the decline in funding costs. Banks’ active financing demand remains weak. In the term structure, the spread between short-term CDs and longer-term CDs has been further compressed. For AAA-rated CDs, the spread between 1M and 1Y is less than 10BP. The spread between 1M and 3M is only 2BP. The yield curve of interbank CDs has been further flattened. Liquidity in the banking system is abundant, showing structural rather than phase-based characteristics. Looking ahead to April, under the anchoring of low funding costs, interbank CD prices are also expected to have difficulty moving upward. Observe whether the policy side introduces further measures to improve the transmission mechanism of monetary policy. If there is no upside surprise, CD yields are still expected to maintain a downward trend.

III. Bond market supply

3.1 Supply of interest-rate bonds: Supply in March remained fairly steady

In March 2026, a total of 1M yuan of Treasury bonds were issued, 3M yuan matured, and net financing was 2978.1 billion yuan; the net financing amount decreased versus 2025. Policy bank financial bonds were issued at 6M yuan, with 1M yuan maturing, and net financing was 857.5 billion yuan; the net financing scale was basically the same as last year. Local governments issued 1M yuan, with 4191.54 billion yuan maturing; net financing was 1M yuan, and the net financing scale was slightly lower than last year. Looking at vertical comparisons, in February 2026, total financing of interest-rate bonds was 3M yuan, lower than the 1.38T yuan in the same period last year—so the interest-rate bond supply pressure in March was clearly alleviated versus last year.

In terms of issuance pacing, in March the supply of interest-rate bonds continued the overall pattern of steady rhythm. Given the general guiding direction of smoothing the issuance pace in recent years, it is expected that the supply scale in April will also be hard to accelerate, and overall interest-rate supply pressure will remain limited. In terms of issuance progress, as of the end of March, the completion rate of newly issued general local government bonds reached 32.5%, and the issuance progress of newly issued special local government bonds reached 26.6%. The general bond progress is close to last year, while special bond progress is slightly faster than last year.

For special refinancing bonds, by the end of March 2026, cumulative issuance had reached 1.08T yuan, completing about 48.1% of the annual pre-set quota. The issuance pace is ahead of the months naturally. For Treasury bonds, by the end of March, the completion rate reached 18.6%, slightly slower than last year’s 27.2%. But it is close to the average 17.4% over the past three years, and overall progress is not slow. Overall, the current issuance rhythm of interest-rate bonds is moderate. Some individual projects are ahead, but there is no strong necessity to accelerate issuance. It is expected there will be no short-term supply shock to interest-rate bonds.

IV. Institutional behavior

4.1 Cash bond trading: In March, institutions favored the short end

In terms of cash bond trading for interest-rate bonds, the buying pace of allocation-oriented institutions is relatively stable, while trading-oriented institutions’ operations are generally conservative. By institution type, banking institutions in March still maintained a buying posture, but showed duration differentiation: large banks tend to buy medium-maturity issues in the 3Y-7Y range; small and medium-sized banks show some preference for ultra-long-end products above 10Y, resulting in substantial net purchases, with buying intensity clearly higher than in the past two years. By contrast, insurance firms’ enthusiasm for buying the long end decreased somewhat. Their allocation pace remains stable, but the purchase scale is lower than the same period in 2025.

For funds, this year overall shows a net selling position, and in March, signs of selling have increased. Based on historical patterns, late March is often an incremental window for net fund purchases. But this year, overall buying intensity is lower than in previous years, and purchase maturities are mainly concentrated in the 7Y-10Y range. In addition, funds are more cautious with interest-rate products above 10Y; trading volume is lower, and in March they essentially stayed in a state of no net buying or selling.

For wealth management products, the allocation intensity toward interest-rate bonds remains stable, but there is a fairly noticeable change in the term structure. The 3Y-and-below bucket sees stronger incremental allocation, approaching the highest level in recent years with a relatively stable pace. The rest of the buckets are in a net selling state within the year. In particular, in March, the selling intensity for the 3Y-7Y bucket and for products above 10Y increased to some extent.

Overall, the current behavior of trading-type institutions tends toward defense. Funds show some “grouping together” on the short end, matching the curve steepening characteristics in March, where short-duration bonds strengthen while long-duration bonds weaken. Going forward, the long end is affected more by inflation data. If the released March inflation data does not show a clear increase, the long end may shift toward strengthening. At that time, trading-oriented institutions may have some risk appetite shift, which could also help flatten the yield curve. This is worth moderate attention.

4.2 Leverage ratio: Leverage remains within a reasonable range

In March, the total leverage ratio in the bond market continued to remain stable, with an estimated central point of about 107.2%, slightly lower than last month. By institution type, securities firms’ leverage ratio shows larger fluctuations and has slightly declined. For insurance institutions, the leverage ratio has entered a seasonal phase of recovery, and it is expected to continue to be repaired. At the end of March, the market’s outstanding balance of reverse repos was 11.1 trillion yuan, slightly lower than at the end of February. Overall, current funding demand still remains in a stable range, and market trading sentiment is relatively calm.

V. Market outlook

From a mid-term perspective, the yield curve shape is expected to level off moderately: long-end yields repairing downward and short-end yields repairing upward. The main negative factors for the current long end are primarily related to the inflation level. With indications that the U.S.-Iran situation may ease and with China’s import-driven inflation stabilization mechanism taking effect, the strength of March inflation may be weaker than previously expected. This could help the long end enter a moderate repair process. Keep an eye on subsequent data. For the short end, short-duration Treasury yields have begun to fall below the current funding cost. Allocation strategies that add leverage and carry on short-duration instruments do not generate excess returns. From this viewpoint, “grouping together” at the short end is prone to fall apart. If, in the future, the Middle East situation continues to ease and the long end enters a repair process, the shift in investors’ risk appetite for funds may further push the process of flattening the yield curve, which should be watched with appropriate attention.

Overall, in the near term, there is still no obvious sign of a full-scale easing of monetary policy. The rate-cut timing may be around mid-year or later. Before consistent rate-cut expectations form, the bond market is unlikely to see a systematic strengthening. It is expected that in April, the bond market will mainly show structural adjustment features characterized by a flattening curve. March inflation data and further easing in the U.S.-Iran conflict are all potential triggers that should be kept under close watch.

Risk of overseas market volatility: Prolonged inflation has caused some negative impact on U.S. and European markets. Corporate costs rise, household demand declines, and prices of industrial and consumer goods increase. Constrained by the inflation issue, the Fed’s rate-cut process is slow, which objectively brings the risk of recession in overseas markets. With Trump taking office, the idea of de-globalization has gained some momentum overseas, creating additional pressure for China’s technological development and foreign trade.

Geopolitical conflict risk: The Russia-Ukraine conflict still has substantial uncertainty. With NATO’s continued support for Ukraine and Russia’s continued hardline stance, the situation of the Russia-Ukraine war remains unstable. Meanwhile, if a conflict breaks out between the U.S. and Iran, there will still be considerable uncertainty afterward. As a result, global financial markets may experience some volatility and even regional systemic risks. It is necessary to consider how risks transmit globally and implement safeguards.

Risk of accelerated “credit expansion” due to looser credit: With the continued introduction of policies to stabilize growth, the credit expansion process keeps advancing and government bond supply is abundant. As infrastructure and investment-driven measures progress, there is potential for credit expansion to accelerate, which would raise market risk appetite. Given that the current liquidity environment is more complex than in recent years, the combination of credit loosening and a faster shift toward accelerating liquidity could push the market toward a turn, causing bond yields to rise and prices to fall.

Security research report title: 《Pay attention to changes in the structure of the yield curve shape——Liquidity, institutional behavior, and a monthly report tracking interest-rate bonds (II)》

Overseas release date: April 2, 2026

Report issuing institution: CICC Construction Investment Securities Co., Ltd.

This report’s analyst:

Zeng Yu SAC Code:S1440512070011

Qu YuanYuan SAC Code:S1440524070011

A massive amount of information and precise interpretation—available in the Sina Finance APP