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Li Shuchao, reporter of China Fund News

As the scale of public bond funds continues to rise, the market value of public bond investments has also hit new highs. Data shows that as of the end of June 2024, the total market value of public bond investments was 17.92 trillion yuan, approaching the 18 trillion yuan mark. In terms of investment direction, public funds have a strong willingness to increase their holdings of dividend asset-type industrial bonds, and there is a differentiation in the allocation of municipal investment bonds, with municipal investment bonds in some weak and medium-sized regions being increased.

The interviewed institutions and industry insiders said that under the debt regulatory environment, the supply of municipal bonds is limited, and industrial bonds with dividend assets represented by utilities, coal, and steel are favored by public funds due to their stable fundamentals, development expectations, and good historical returns. At the same time, they suggested paying attention to investment opportunities in new quality productivity directions such as industrial bonds in high-tech industries and scientific and technological innovation products.

The total market value of public bond investments is approaching 18 trillion yuan

Set a new historical high

Wind data shows that as of the end of June 2024, the total market value of public bond investments was 17.92 trillion yuan, approaching the 18 trillion yuan mark; the market value of public bond investments accounted for 10.95% of the existing bond market size, also setting a historical high, and the status of public funds as institutional investors in the bond market has been further enhanced.

China Merchants Fund stated that with the expansion of the scale of public bond funds and the increase in the proportion of holdings, public funds have become an indispensable source of active trading pricing and allocation power in the bond market. Public funds have a rich product line and relatively diverse strategies, providing important support for the primary issuance and secondary market price discovery of bonds of various types and maturities, and have a significant impact on the stability and liquidity of the bond market.

Bosera Fund also stated that as the central risk-free interest rate declines, public funds will continue to leverage their advantages of standardized operations and mature investment and research systems in the future to improve the market-oriented pricing capabilities and market resilience of the bond market, and promote the stable and healthy development of the bond market.

The director of fixed income at a large fund company also said that the reason behind the rise in the market value of public bond investments is that, on the one hand, with the implementation of the new asset management regulations, public funds, as pioneers of net value management, have played their advantages in the supply of stable products. On the other hand, benefiting from policy promotion and the allocation demand for public bond-oriented products, the market value of public bond holdings among institutional investors in the bond market has risen.

The fixed income director said that public funds are important participants in the bond market and can fully play the role of value discovery and resource allocation, continuously increase bond investment, guide more financial resources to flow to directions with greater growth potential in the real economy, promote high-quality development of the real economy, and help increase the proportion of direct financing.

There is a strong willingness to increase holdings of dividend asset-type industrial bonds

Judging from the holdings structure of public funds in the second quarter report this year, public funds have increased their allocation to industrial bonds, while there has been a differentiation in the allocation to municipal bonds.

A research report by Guolian Securities shows that as of the end of the second quarter of 2024, public utilities, non-bank financial, comprehensive and coal industries were the major industries among public funds' holdings of industrial bonds, and the scale of holdings of private enterprise industrial bonds increased by 8.69% from the previous quarter.

China Merchants Fund said that public funds increased their allocation to industrial bonds in the second quarter of this year, especially dividend-yielding industrial bonds, which was mainly due to the fact that relevant high-credit-quality entities began issuing a large number of ultra-long-term industrial bonds after March.

China Merchants Fund analyzed that in an environment of low interest rates and narrowing term spreads, bond issuers tend to issue low-interest long-term bonds to adjust their debt structure, while mainstream credit bond allocation institutions represented by public funds have been under-allocated this year and have been more willing to extend the duration, forming a pattern of strong supply and demand for industrial bonds, especially ultra-long-term dividend industrial bonds. Data shows that from 2020 to 2023, the issuance scale of ultra-long-term credit bonds accounted for about 2%, but in the first half of this year, the issuance scale of ultra-long-term credit bonds accounted for nearly 6%.

A large fund company in South China also said that the reasons for the strong allocation of industrial bonds in the second quarter of this year are as follows: On the one hand, the supply of municipal investment bonds is limited under the debt reduction supervision environment, and the allocation of incremental funds to municipal investment bonds has weakened, thus turning to industrial bonds. On the other hand, in the environment of bond market interest rates bottoming out and weak economic recovery, dividend asset industrial bonds represented by public utilities, coal, and steel are favored due to their good historical returns and relatively stable development expectations.

The fixed income director of the above-mentioned large fund company also said that against the backdrop of insufficient supply of municipal bonds and continued downward interest rates, the market's attention to industrial issuers continues to increase, and the dividend asset industrial bond industry has relatively controllable risks and a certain profit margin, so it is more popular.

From the perspective of future trends, industry insiders believe that the dividend asset industry may still have relatively stable fundamentals, and the favored pattern is expected to continue. If the supply of industrial bonds continues to expand in the future, public funds may continue to increase their allocation of industrial bonds. However, considering that the pace of government bond issuance may accelerate in the second half of the year, the "asset shortage" in the bond market is expected to ease, and it is necessary to pay attention to changes in the supply and demand structure of the bond market.

In addition, the fixed income director of the above-mentioned large fund company added that new quality productivity is an important direction and guide for the development of the manufacturing industry in the second half of the year. It is expected that policy support will be strong. It is recommended to pay long-term attention to the expansion opportunities of industrial bonds in high-tech industries and scientific and technological innovation products.

Urban investment bond investment shows a trend of gradual decline

Among the municipal investment bonds, some municipal investment bonds in weak and medium-sized regions have been increased. Guolian Securities' research report shows that the total market value of holdings in Gansu, Qinghai, Yunnan and other places increased by 9.28%, 47.12% and 19.34% respectively compared with the previous quarter. In addition to the traditional strong-qualified regions, Chongqing's district-level municipal investment holdings accounted for as high as 41.84% in the second quarter of this year, and Guizhou's district-level municipal investment holdings accounted for 17.44%, which may indicate that fund institutions have strengthened their willingness to sink municipal investment platforms.

China Merchants Fund stated that since the implementation of the package debt reduction plan in July 2023, the valuation of municipal bonds has changed rapidly, and the market has shown an obvious downward trend from short-term to long-term, and from medium and high-grade to low-grade municipal bonds: at the end of July 2023, the 1-year AA-, 3-year AA (2) and AA, and 5-year AA first began to sink; at the end of November of that year, after the short-end interest rate spread was compressed, the market began to sink 3-year AA- and 5-year AA (2); at the end of January 2024, it began to sink 5-year AA-.

"At present, except for long-term low-grade products, the grade spreads of most municipal bonds have been compressed to extremely low levels. The current cost-effectiveness of municipal bonds is relatively small." said a person from China Merchants Fund.

In terms of specific investment, China Merchants Fund prefers municipal-level main platforms in cities with reasonable economic scale, good local industrial foundation and appropriate debt ratio, and can make appropriate exploration in strong prefecture-level cities and counties in strong coastal provinces. In addition, considering that the current spread of municipal investment bonds has been compressed to a relatively low level, it is necessary to be cautious about municipal investment bonds in key provinces for debt reduction.

The above-mentioned large fund companies in South China also stated that, first of all, benefiting from the package of debt reduction policies, public funds have significantly increased their holdings of municipal bonds in some weak regions. For example, the total market value of holdings in Gansu, Qinghai, Yunnan and other regions has increased compared with the previous quarter, while the total market value of holdings in low-yield regions with better qualifications has declined to varying degrees, such as Guangdong, Jiangsu, Zhejiang, etc. Secondly, with the orderly advancement of debt reduction policies, the appropriate credit sinking and duration extension strategies for municipal bonds are still feasible, focusing on the opportunities for sinking municipal bonds within 3 years, and extending the duration to 5 years requires focusing on controlling credit qualifications. In terms of yield mining, we can focus on the capital cities of key provinces and explore individual bond opportunities that take into account excess spreads and good liquidity.

The fixed income director of the above-mentioned large fund company also said that driven by the package of debt reduction policies, the new issuance of municipal investment bonds has been restricted, and municipal investment bonds have gradually entered the stock era. Combined with the continued decline in interest rates, the current market trend is more dependent on policy guidance and institutional under-allocation logic. In terms of capital investment, provincial platforms and prefecture-level platforms are still the first choice for public funds, accounting for nearly 70% of the total, and provincial parks and national parks bonds have been increased.

"Overall, under the debt reduction policy, the net financing of municipal bonds has shrunk significantly and the credit spread has narrowed. It is recommended to focus on medium and high-grade platforms and be vigilant about policy changes in the medium term." said the fixed income director.

Editor: Xiaomo

Audit: Wooden Fish

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