Recently, the bond market has exhibited a volatile pattern. In the absence of clear trading themes, market sentiment remains weak, and prices fluctuate in response to news flows. Last week, affected by real estate credit risk events and market rumors, short-term market concerns were amplified.
“Over the past period, investors have grown accustomed to earning stable returns in the bond market, but recently the market dynamics have shifted”, noted some bond fund managers. In their view, volatility is not a short-term phenomenon but a new normal after the bond market’s yield center entered a relatively low level. This imposes higher requirements on industry practitioners, as institutional investors need to shift their mindset from a one-sided market to a volatile market.
Resonance of multiple factors intensifies bond market volatility
Recently, bond market volatility has increased significantly. Last week, the bond market maintained a volatile trend, with signs of redemption and stop-loss among institutions. Although the bond market partially recovered in the second half of the week, the performance of short-to-medium-term bonds remained unsatisfactory.
Bond extension events of real estate enterprises have become the direct trigger for recent market risk aversion, with several related bonds suspended from trading recently. In addition, market discussions on the reform of bond fund redemption fees and other rumors have amplified short-term market concerns. From the perspective of industry insiders, the provisions on bond fund redemption fees in the new rate regulation have weakened the attractiveness of bond funds as short-term trading tools, leading to a substantial increase in the cost of the high-frequency trading strategy for interest rate spreads commonly used by institutions previously.
“We have truly felt the pressure recently. Although the products under my management have not yet experienced large-scale redemptions, investors will barely withstand further adjustments”, said a bond fund manager from a medium-sized and small fund company. As the year-end approaches, institutional investors have continued to sell. Furthermore, recent concerns about news such as the reform of bond fund redemption fees have further exacerbated market volatility.
Bond fund scale continues to shrink
Since the second half of this year, affected by the stock-bond seesaw effect, the scale of bond funds has continued to decline. According to the latest data disclosed by the Asset Management Association of China (AMAC), as of the end of October, the total share of bond funds stood at 5.632611 trillion units, a month-on-month decrease of 133.891 billion units from the end of September; the total scale reached 7.100345 trillion yuan, down 104.322 billion yuan month-on-month. Notably, bond fund shares have been decreasing for four consecutive months since July this year.
From the perspective of industry insiders, the current volatility in the bond market is not a short-term phenomenon but a new normal after the bond market’s yield center entered a new stage of relatively low levels. In the future, wide-ranging volatility will become common, and the market will need time to adapt to the new yield range, which imposes higher requirements on market participants. Lyu, a bond fund manager from the Public Offering Fixed Income Department of Xinghua Fund, stated that currently “the equity-like characteristics of bonds have become increasingly prominent”, placing higher demands on fund managers’ abilities in market timing, profit-taking, and stop-loss.
Looking ahead to the future market, fund managers concur that volatility may become the main theme of the bond market for a period. However, in the medium-too long term, there is no pessimism toward the bond market. Hongde Fund holds the view that the overall direction of the bond market remains unchanged. From both fundamental and policy perspectives, bond assets still have allocation value, and the market is likely to maintain a volatile trend by the end of the year.
China Merchants Fund argues that as the year-end allocation phase approaches, the expected risk-reward ratio is insufficient. Currently, the 10-year Treasury bond yield fluctuates between 1.8% and 1.85%, which is in the upper-middle range of the People’s Bank of China’s (PBOC) focus interval. In the absence of a clear market main theme, prices may fluctuate in response to news flows. Meanwhile, valuation cost-effectiveness should be considered – coupon value has become prominent, and allocation-oriented investors can operate proactively. In terms of product types, for ultra-long-term bonds with sufficient spread protection, after the supply peak in the last week of November, allocation-oriented investors may pay attention to left-side positioning opportunities in December. Credit bonds with maturities of more than 5 years offer relatively large spread space and favorable cost-effectiveness.
Lyu predicts that in the first quarter of next year, both the bond and stock markets may experience volatile trends. By the second and third quarters, the stock market will be more attractive than the bond market. Therefore, the first three quarters are suitable for prioritizing the coupon strategy, with duration strategy integrated into enhancing returns. Beyond that, greater emphasis will be placed on the duration strategy.