In recent weeks, the bond market has shown clear signs of weakness, particularly noticeable in the short-term bonds which have seen a marked declineLast week, the yield on one-year government bonds increased by 13 basis points, settling at 1.19%. Similarly, the yield on ten-year bonds rose by 7 basis points to 1.65%, while the thirty-year government bonds slightly increased to 1.87%. These movements in yields point to a cautious sentiment among investors, reflecting broader economic conditions.
Several fund companies have expressed concerns regarding emerging changes in both the fundamental and liquidity aspects of the bond marketFrom a fundamental standpoint, data released on January 9 indicated that the core Consumer Price Index (CPI) in China rebounded by 0.4% in December 2024, a development that could exert negative influences on the bond marketMoreover, the U.Snon-farm employment data unexpectedly exceeded market expectations, adding further pressure on the Chinese bond landscape
On the liquidity front, the People's Bank of China has opted to temporarily suspend direct purchases of government bonds in the open market, signaling an intention to curb excessively rapid declines in interest rates.
An emerging trend worth noting is the prevailing environment within the bond market, which is currently characterized by low rates and restricted upward movement, leading to increased volatilityThis situation has pushed the bond market into a stage where the expectation of returns remains decent, though with relatively low payoutsConsequently, many investors are choosing to diversify their portfolios by incorporating convertible bonds, dividend stocks, and other low-volatility equity assetsThis shift has revitalized interest in “fixed income +” strategies.
The recent adjustments in bond yields have prompted various fund managers to re-evaluate investment strategies
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A multitude of bond funds has been adversely affected by the upward trend in yields, leading to declines across over 80% of bond funds last week, with several experiencing drops exceeding 1%. The heightened volatility in the bond market has led some funds to implement changes in their net asset values, reflecting larger than usual redemptions from investorsNotably, just on January 10, five bond funds were forced to announce adjustments to their net asset value due to significant redemptions, indicating a broader trend since the start of 2025 where around 22 bond funds have had to recalibrate net values in response to heavy outflows.
Market analysts suggest that the bond market is likely to enter a phase of oscillationGiven the Central Bank's clear intentions to manage interest rate movements, further declines in rates could trigger additional regulatory actionsIndustry experts anticipate that while the suspension of government bond purchases will affect short-term bond yield dynamics more profoundly, its direct impact on longer-term bonds is expected to be minimal
Theoretically, as short-term government bond yields dipped below 1%, they diverged in a significant manner from other similar investment products, emphasizing the current disarray in the short-term bond market.
Looking further ahead, views on bond yield trajectories indicate limited upward movement in interest ratesThis perspective is anchored in several factors: solid demand in the early part of the year driven by government debt outstripping supply, the temporary nature of the Central Bank's actions, and the overarching context of the economic recovery strategy which supports a moderate and sustained easing of monetary policyConsequently, further interest rate cuts or reserve requirement ratio reductions are likely to be on the horizon as the economic landscape continues to evolve.
In parallel, sentiment from investment firms such as Xingyin Fund emphasizes that while the factors currently pressuring bond yields exist, the general yield environment is expected to remain low
The confluence of limited growth impulses in the fundamental landscape, alongside challenges posed by increasing bond supply and narrowing monetary policy ranges, suggests that the feasibility of substantial declines in interest rates may be hinderedThrough a balanced approach of maintaining neutral durations and leverage in bond portfolios, investors may benefit from actively managing exposure across different segments of interest-bearing assets to optimize returns.
Furthermore, support for the “fixed income +” investment thesis has seen renewed enthusiasm in the capital marketsThe strategic allocation to bond funds remains a critical component of mid- and low-risk portfoliosYet, in the current setting of low rates and potential volatility, many investors are advised to consider diversifying into convertible bonds and dividend-paying stocks to enhance yieldThis has led to heightened interest in “fixed income +” strategies where portfolios are designed to benefit from both stable income from bonds and potential growth from equity-related assets.
Investment firms propose two primary approaches for bond fund allocation to optimize risk and returns
First, for investors focused on a positive investment experience with minimized volatility and drawdown risks, there is a strong case for favoring short- to medium-term bond fundsHistorical data indicates that such funds boast notably lower volatility relative to their long-term counterparts, emphasizing a more stable investment path.
Second, investors prepared to endure potentially higher drawdowns in exchange for better returns should explore “pure bond +” strategies that include converting bonds and equities within their portfolio blendThis approach enables a higher proportion of bond holdings while strategically leveraging smaller allocations to other asset types, aimed at maximizing potential portfolio performance.
In light of the current low rate environment, experts from CICC have outlined three critical avenues for fixed-income fund strategies moving forward