Potential Impact on China’s Bond Market if Trump Wins – Insights from Zheshang Securities FI

Be cautious of bond market correction risks triggered by Trump’s victory in the fourth quarter of 2024. The latter half of 2024 marks a crucial period for the U.S. elections. With Trump showing relative dominance in the first debate in June, if he maintains this advantage in the second debate on September 10th, the market might revert to a “Trump trade” scenario post the November elections.

Considering the potential continuation of tariffs on China and subsequent depreciation pressure on the Chinese yuan under a Trump presidency, this could lead to negative disturbances in domestic stocks, bonds, and foreign exchange.

The risk of unexpected adjustments in the bond market in the fourth quarter of 2024 is heightened due to the triple disturbances of “Trump trade + potential U.S. Treasury bond pullback after the Fed’s rate cut + divergence between bond market’s buying inertia and central bank’s risk warnings.”

Referencing the period from Trump’s election as U.S. President on November 9, 2016, to mid-December 2016, where the 10-year Chinese government yields adjusted upwards by nearly 57 basis points, the primary market bear factors were “Trump’s election + economic recovery + tight liquidity.”

While the current economic fundamentals are still in a weak recovery phase, risks of tight liquidity persist due to end-of-quarter and tax period disturbances. Coupled with the potential rise of “Trump trade” risks and the likely pullback in U.S. Treasury bond yields after the Fed’s rate cut, the prolonged divergence between the bond market’s buying inertia and central bank’s risk warnings amplifies the risk of unexpected adjustments in the bond market in the fourth quarter of 2024.

In summary, we believe that the domestic bond market may generally experience range-bound volatility in the third quarter of 2024, with the expected fluctuation range for 30-year Chinese government being 2.4% to 2.55%, where a strategy of buying at high levels remains relatively advantageous.

However, in the fourth quarter of 2024, under the multiple disturbances of “Trump trade + potential U.S. Treasury bond pullback after the Fed’s rate cut + divergence between bond market’s buying inertia and central bank’s risk warnings,” the bond market faces risks of unexpected adjustments, with the potential for 30-year Chinese government yields to rise above 2.6%.