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Since the beginning of this year, a large amount of funds have continued to flow into the bond market, which has also promoted the "bond bull market".BondsAs prices gradually rise and long-term government bond interest rates continue to hit record lows, the market is worried about the risks behind the bull market.

In the past few months, the central bank has used multiple channels to alert the market to bond market risks.Public FundsRecently, it also announced the suspension of large-scale subscription of bond funds and other businesses.

From August 5 to 12, bond prices experienced a wave of substantial adjustments, and recovered somewhat on August 13. When talking about subsequent investment opportunities in the bond market, the interviewees believed that there was still allocation value in the medium and long term.

Big volatility in bond market

On August 5, the 10-year and 30-year Treasury bond yields fell to 2.09% and 2.3% respectively, but the downward trend of the bond market was significantly reversed. From August 6 to 12, the bond market interest rates rose all the way. On August 12, the bond market ushered in a substantial adjustment, and the main contract of 30-year Treasury bond futures fell by more than 1% during the session. On August 13, the bond market rebounded again, and the main contract of 30-year Treasury bond futures closed up 0.62%.

Image source: wind

Industry insiders believe thatBehind the current frequent fluctuations in the bond market is the game between bulls and bears.It is reported that the sharp drop in the bond market from August 6 to 12 was caused by large banks selling interest-bearing bonds under the guidance of the central bank.

In fact,Regulators have stepped in many times to speak out and guide the bond market.

According to the announcement released on the official website of the People's Bank of China on July 1, in order to maintain the stable operation of the bond market, based on prudent observation and assessment of the current market situation, the People's Bank of China decided to carry out treasury bond borrowing operations for some primary dealers in open market operations in the near future.

The market had speculated that the central bank carried out the treasury bond borrowing operation in preparation for the subsequent sale of treasury bonds in the open market. Since the release of the above central bank announcement, the 10-year and 30-year treasury bond yields have rebounded slightly, but then fell all the way to the low point of the year on August 5. Prior to this, the 10-year treasury bond yield had already hit a historical low since the end of April 2022.

Economist Zhang Xuefeng said in an interview with the International Financial News:The recent sharp fluctuations in bond prices are mainly due to the central bank's inclusion of government bond trading in the scope of open market operations."There has long been discussion in the market about the central bank's involvement in government bond trading. The central bank said it was a necessary measure to increase the monetary policy toolbox and would play a strong role in the coordinated regulation of the economy by fiscal and monetary policies."

Zhang Xuefeng also said that the central bankReverse repoMedium- and long-term bonds inject liquidity into the market, which, on the one hand, raises the market price of bonds and reduces yields; on the other hand, existing bond holders in the market take the opportunity to sell their bonds, causing price decline momentum and yields to become unstable.

Wind data shows that the current 10-year and 30-year government bond yields are 2.23% and 2.41% respectively. However, in mid-May this year, the Financial Times published an article stating that "based on the normal operation of the market in recent years, 2.5% to 3% may be a reasonable range for long-term government bond yields."

The long-term government bond interest rate has been declining, which has attracted the attention of regulators to risk prevention. At the end of May this year, the central bank clearly stated in response to media inquiries that it is paying close attention to the current changes in the bond market and potential risks, and will sell low-risk bonds including government bonds when necessary.

A pleasing bond fund

As the bond market is bullish, the returns of bond funds are also rising.Wind data shows that as of August 12, the average annual net asset value growth rates of medium- and long-term bond funds and short-term pure bond funds were 2.51% and 1.92%, respectively.

As the equity market performed generally, the more stable returns of bond funds naturally attracted more investors. Data showed that from January to July this year, bond funds took up the banner of the fund issuance market, with a total issuance of 592.79 billion shares, accounting for 80.69% of the total issuance shares. Among them, the new issuance shares in March, April and June all exceeded 100 billion.

Regarding the popularity of bond funds this year, Yan Shusheng, investment manager of Financial Cube, told the International Financial News reporter that there are three main reasons:

One is the loose monetary environment.The central bank implemented a relatively loose monetary policy and took measures such as lowering interest rates, which caused bond interest rates to gradually decline, thereby pushing up bond prices and attracting more investors to enter the bond market.

Second, the cost-effectiveness of bond funds has improved amid asset shortage.Specifically, the stock market has performed weakly in recent years, with increased volatility, in sharp contrast to bonds; in a loose monetary environment, with the reduction in policy interest rates, the yields on bank deposits and wealth management products have also decreased accordingly; against the backdrop of a weakening macro economy, the profit margins of industrial investment have shrunk, while risks have increased.

Third, bond funds have achieved impressive returns.Data provided by Financial Cube shows that as of August 9, the return of the pure bond fund index has reached 2.6% so far this year.Annualized Rate of ReturnIt reached 4.27%, significantly better than other mainstream stable assets.

Under the hot trend, regulators and institutions have become more cautious about the operation of bond funds. Recently, there have been rumors in the market that "regulators do not allow the issuance of public bond funds." According to multiple media reports, although public fund companies have not received any explicit instructions or window guidance, they have felt that the approval of bond fund products has slowed down.

In addition, many bond funds recently announced the suspension of large-amount subscriptions and other businesses. For example, Dacheng Jingxu Pure Bond has suspended large-amount subscriptions of more than 50 million yuan per account since August 14; GF Jingyang Pure Bond has suspended large-amount subscriptions for institutional investors since August 13, limiting the daily subscription amount of a single account to less than 100,000 yuan; SDIC UBS Qiyuan Interest Rate Bond has suspended large-amount subscriptions from August 14 to 19, limiting the amount to less than 500 yuan. The reasons given by the aforementioned bond funds for suspending large-amount subscriptions are to ensure the stable operation of the fund and protect the interests of fund unit holders.

Against the backdrop of a weak equity market, many investors prefer bond funds, but regulatory authorities have recently warned of the risks of products investing in bonds.

On August 10, the central bank pointed out in the "Special Column of the Monetary Policy Implementation Report for the Second Quarter of 2024": "Investors should carefully evaluate asset management products.Investment Risksand revenue.”

The above report pointed out that since the beginning of this year, the annualized yields of some asset management products, especially bond-type wealth management products, have been significantly higher than the underlying assets, mainly achieved through leverage, and there is actually a large interest rate risk.

The report also stated that in the long run, asset management products cannot have both "low risk" and "high returns" at the same time. While pursuing high returns, one must also bear high risks.

Adjusted Opportunities

The bond market is experiencing dramatic fluctuations. What should investors holding bond funds do?

"The recent adjustments in the bond market have little to do with fundamentals and funding, but are more related to regulatory guidance." Wei Jian, fund manager of Great Wall Fund, believes that there is no basis for the bond market to move in a directional bearish direction.In the medium to long term, the downward trend in yields may not change, and each adjustment is expected to be an investment opportunity.

Yan Shusheng believes that the bond market is affected by many factors, among which macroeconomic fundamentals and policies are the most core and critical factors. "At present, my country's macro-economy is still facing great downward pressure, and the loose monetary policy implemented by the central bank has provided support for the bond market. In the medium and long term, the bull market foundation of the bond market remains."

However, Yan Shusheng said that some measures in the short term may bring certain adjustment pressures to medium- and long-term bonds. For example, in order to prevent the bond market from being too crowded and long-term interest rates from falling too quickly, the central bank has recently taken a series of measures, including selling treasury bonds and reducing the collateral of the medium-term lending facility (MLF).

Regarding the selection of bond funds, Wei Jian believes thatOverall, the value of long-term bond allocation is relatively obvious at the current point. Funds with stable liabilities or investors who are cautious in the early stage can consider paying attention to long-term bonds or funds. At the same time, pay close attention to the impact of the central bank's actions on the bond market in transactions, and do a good job of duration management.

Zhang Xuefeng also said,Focus on medium- and long-term bond funds"In the treasury bond market, especially after medium- and long-term treasury bonds were included in the monetary policy toolbox, as the central bank implements its regulatory targets, the magnitude and frequency of price fluctuations will increase. Therefore, medium- and long-term bond fund investments should pay attention to the 'peak suppression and valley filling' effect, that is, be vigilant against declines at peaks and hedge prices at troughs."

For investors who prefer to maintain low risk and stable returns, Yan Shusheng recommends investing mainly in pure bond funds.In terms of product selection, it is recommended to focus on interest rate bond funds or credit bond funds with high credit ratings and relatively dispersed holdings; in terms of duration selection, given that the recent measures taken by the central bank may lead toLong-term bondsThere is adjustment pressure, and it is recommended to be cautious about investing in long-term bond funds in the short term.

Reporter: Xia Yuechao

Editor: Chen Si

Editor in charge: Bi Dandan