The financial landscape today is characterized by volatility and uncertainty, reminiscent of a dramatic storm brewing on the horizonMorning trading saw the bond market demonstrating remarkable vigor while the stock market remained flat and oscillatingThe yield on the ten-year government bonds has reached the noteworthy threshold of 1.8%, with the yield spread between U.Sand Chinese ten-year bonds expanding to nearly 250 basis points, marking the widest gap in over twenty-two years.

As the midday session approached its end, an unexpected surge occurred in the Hong Kong stock market and the FTSE China A50 Index futuresNotably, a tripling of the long position in the FTSE China ETF led to an almost 5% pre-trading increaseSimultaneously, the three main indices on the A-share market also surged ahead of the lunch break, showcasing a sudden upswing.

By the closing bell, the three major A-share indices collectively rose, with the Shanghai Composite Index finishing 0.85% higher, the Shenzhen Component Index up by 1.00%, and the ChiNext Index gaining 1.35%. However, the Northern Securities 50 Index saw a decline of 1.31%. The overall trading volume in the market reached a substantial 188.74 billion yuan, an increase of 89 billion yuan compared to the previous day.

The expectation of an impending interest rate cut by the U.S

Federal Reserve has notably enhanced the performance of the Hong Kong stock market, which closed with a gain of 1.20%. The Hang Seng Technology Index also rose by 1.53%, reflecting investor optimism spurred by monetary easing prospects.

This phenomenon raises critical questions: who initiated these movements? What factors are influencing the shifts in the market dynamics we are witnessing?

The bond market's recent performance has indeed created a sense of unease among investorsThe resurgence of the phrase "moderate easing" in monetary policy discussions after a fourteen-year hiatus underscores this environmentIt appears that the investors' anxiety is justified as government bond yields continue to declineRecently, the ten-year bond yield fell another two basis points to the critical 1.8% level, coinciding with the largest yield gap between U.Sand Chinese bonds in over twenty-two years.

Such a rapid ascent in bond prices can be largely understood against the backdrop of marginal improvements in economic fundamentals, although the prevailing sentiment regarding economic conditions remains cautious

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Moreover, the outlook for interest rates seems solidly downward, as the anticipated "moderate easing" in monetary policy and expectations of U.SFed rate cuts intensify, thereby suggesting that the central tendency of interest rates will continue to decline.

Nonetheless, there are growing concerns that the bond market may have raced ahead too swiftly, incorporating too much of the potential rate cuts into current pricingThis scenario suggests that once the actual interest rate cuts are executed, the ultimately anticipated positive impacts might transform into negative market responses.

Projections from the fixed-income team at Ping An Securities indicate that assuming a 4% fiscal deficit in 2025, with a special treasury issuance of 2 trillion yuan and followed by a series of rate cuts by the Fed between two to three times, with an estimated drop of 30 to 40 basis points, next year’s ten-year bond yield could settle between 1.8% and 2.2%. Presently, with the yield at 1.8%, the trajectory ahead remains uncertain.

In this evolving context of low-interest rates, the implications for investment strategies are profound

As we transition into an era where government bond yields have entered the "1%" domain, shifts in asset allocation logic become imperativeWith constraints imposed by exchange rates and an ongoing array of stimulus policies from China, a continued decline in bond yields appears increasingly unlikely.

As yields touch historic lows, this inadvertently elevates the perceived value of equity assets, which is often described in strategic circles as an increase in "equity risk premium," also known as the relative attractiveness of stocks versus bondsMarket participants increasingly believe that as long-term interest rates continue to diminish, insurance institutions may find it less tenable to maintain a focus on long-duration bonds, prompting a shift towards equities.

However, it’s crucial to note that such indicators are not bulletproofData reviewed by CITIC Securities shows that the risk premium's predictive accuracy regarding forward returns for stocks versus bonds stands at approximately 79% over a horizon of one year

The signal that the equity-bond value proposition has crossed above the +2 standard deviation mark has been evident since the latter half of 2022, continuously suggesting a theoretical "buy" signal.

In reality, the feasibility of a bear market in bonds hinges on a robust recovery in economic fundamentals, whereas a significant bullish trend in equities similarly requires an uptick in corporate profitsIn the current environment of expansive fiscal and monetary policies, a simultaneous bullish phase in both stocks and bonds alongside pronounced volatility seems increasingly plausible.

An analysis of the internal funding dynamics within the A-share market reveals several underlying issuesRecently, a widely circulated graphic showing data on buying and selling forces within A-shares since September 24 identified five contributors: net purchases of ETFs, net buying through margin financing, reduction in shareholding by significant stakeholders, net buying by large transactions, and net purchases by institutional accounts

It is worth noting that the last two categories predominantly showed selling activity since the aforementioned date.

For a clearer understanding of the recurring surges followed by sell-offs in A-shares, reference dates of October 8 and December 10 serve as significant examplesUtilizing the Wind All A Index as a benchmark, we can observe the activity of institutions, large accounts, mid-sized accounts, and individual investors.

On October 8, institutions net sold 93.5 billion yuan, large accounts net sold 73.9 billion yuan, whereas mid-sized accounts net bought 60.4 billion yuan, and retail investors net bought 106.9 billion yuanConversely, in the trading session of December 10, institutions net bought 9.289 billion yuan, large accounts net sold 31.9 billion yuan, mid-sized accounts net sold 11.5 billion yuan, while retail investors net bought a substantial 52.869 billion yuan.

Among these transactions, stock ETFs saw a significant inflow of 27.135 billion yuan on December 10, setting a new peak since October 8, further demonstrating the funding's preference for broadly-based ETFs

Noteworthy funds like Huatai-PB's CSI 300 ETF, Southern Asset Management’s CSI 1000 ETF, and others experienced commendable capital inflow, with net inflows of 4.146 billion yuan, 3.57 billion yuan, and additional impressive figures across other ETFs.

Clearly, the backbone of A-shares is becoming increasingly identifiable, compelling regulatory bodies to state, “What is currently required in the market is to eliminate the barriers to long-term capital entering the market.” In alignment with this focus, media reports indicate that funds have increasingly favored stocks that are typically underrepresented in public offerings.

A director from a Shenzhen-based fund remarked that in cases where public funds observe their holdings rising sharply without clear rationale, their instinctive reaction tends to be selling—especially as the price escalatesThis implies that speculative trading often gravitates towards stocks whose fundamentals are not robust.

Hence, policy direction reflects a clear intention to guide “long-term money” into the market, developing a diversified product system, and substantially promoting the growth of indexed investment to introduce greater amounts of incremental capital

This strategy is aimed at reinforcing the market's role as a stabilizing force.

Notably, index funds have recently been officially included in the list of funds for individual pension plans, with the inaugural batch consisting of 85 equity index funds now being incorporatedThis collection mainly comprises 78 various broad-based index tracking products and includes seven that track dividend indices, covering classics like the CSI 300 Index and the ChiNext Index among other retail and enhanced index funds.

The news surrounding these developments prompted immediate reactions in both the Hong Kong and A-shares markets, evidenced by significant inflows shortly before 11:30 AM, presenting a clear upward trajectory in funding flowBy the close of trading, net inflows amounted to 49.4 billion yuan and 22.1 billion yuan, constituting a substantial contribution to the day's market surge.

According to Yifan Fund's analysis, the integration of index funds into personal pension plans is set to attract more long-term incremental capital, thereby fostering a "long-term money, long-term investment" ecosystem