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[Guide] Bond market "puts on the brakes", public funds adjust investment strategies

China Fund News reporter Zhang Ling

Since August, under the frequent "control" of regulators, the bond market has experienced volatile adjustments and bond funds have also seen a significant pullback.

Industry insiders said that after the short-term adjustment of the bond market, the investment value is still worth paying attention to. We should actively pay attention to regulatory policies and market dynamics, and ensure the stable operation of bond fund products by adjusting investment strategies and doing a good job of duration management.

More than 80% of bond funds’ net value has retreated

Multiple measures to adjust investment strategies

Recently, the bond market has been undergoing continuous adjustments. On August 5, the sale of bonds by the four major banks caused a slight adjustment in the market; on August 7, the central bank implemented a zero-yuan reverse repurchase operation, which exacerbated the cautious sentiment in the market; on the same day, the Interbank Market Trading Association launched a self-discipline investigation on four rural commercial banks, and announced in an announcement on August 8 that some small and medium-sized financial institutions were investigated for illegal treasury bond transactions such as lending accounts and profit transfer, and the bond market fell again.

On August 9, the central bank stated that it would conduct stress testing on the risk exposure of financial institutions' holdings of bond assets to guard against interest rate risks. It also pointed out that the annualized yields of some asset management products, especially bond-type wealth management products, were significantly higher than those of the underlying assets, mainly achieved through leverage, and involved greater interest rate risks.

As of August 16, the ChinaBond-Total Wealth (Total Value) Index fell by 0.27% in the past two weeks.

Bond fund performance has experienced a significant correction. Wind data shows that as of August 16, although the average return of bond funds this year is still positive, the net value of more than 3,000 bond funds (only the main code is counted, the same below) has retreated in the past two weeks, accounting for 82%. Among them, more than 80% of the net value of medium- and long-term pure bonds has fallen, with an average yield of -0.13%; nearly 60% of short-term bond funds have retreated in the past two weeks, with an average yield of -0.03%; index bond funds have fallen by an average of 0.17% in the past two weeks.

When talking about subsequent bond fund investment strategies, many interviewed institutions stated that they will actively pay attention to regulatory policies and market trends and adopt a variety of strategies to ensure the returns of bond fund products.

Wells Fargo Fund said that their investment strategy will be mainly based on two dimensions: one is market logic, there will be different dominant strategies at different stages; the other is the characteristics of the liability side.

According to Wells Fargo Funds, as of August 15, 2024, the interest rates of 10-year and 30-year treasury bonds have risen to 2.20% and 2.39%, respectively. When the central bank began to pay attention to long-term yields in early April, the above two interest rates were 2.28% and 2.46%, respectively. In the second quarter monetary policy implementation report, the central bank mentioned that "in late June, the 10-year treasury bond yield approached the 2.2% mark... It has clearly deviated from the reasonable level." It can be seen that short-term long-term interest rates are likely to fluctuate in a narrow range upward or downward.

In this context, Wells Fargo Fund believes that it is necessary to return to the origin of bond investment and seek stability before fighting. Grasp the short-term coupon rate and pay attention to market changes. When the long-term and ultra-long-term ends return to a relatively stable position, combine the stability of its own liability side and pay attention to the allocation value again.

Xinyuan Fund stated that at the operational level, the risk of a major adjustment in the bond market is low, but the downward trend in yields is hindered. In the short term, it is recommended to watch more and do less, and pay attention to the selling of bonds by major banks, the central bank's regulatory attitude, and marginal changes in liquidity.

"It is expected that the adjustment range of 10-year treasury bond yields in this round may be larger than the range when the central bank first warned of long-term bond risks in April this year (about 15BP), but smaller than the adjustment range of 10-year treasury bonds when the net value of wealth management products fluctuated sharply at the end of 2022 (about 30BP). After the market gradually stabilizes, we can consider gradually increasing our positions." Xinyuan Fund said.

Xinyuan Fund believes that the current certainty of the short-term is greater than that of the long-term. This week, the medium-term lending facility (MLF) matures at 401 billion yuan, and the net payment of government bonds exceeds 600 billion yuan. In addition to the tax period, there may be some adjustment pressure on the short-term. It may be a good choice to increase positions after the short-term adjustment. In addition, the current curve is relatively steep, and funds with relatively stable liabilities can try the riding strategy.

A fund company in Beijing said that the bond market has hit the "brakes" and the investment strategy of bond funds needs to be adjusted accordingly. More attention should be paid to risk prevention and control, reducing leverage, reducing investment in low-grade credit bonds, and increasing allocation to high-grade credit bonds and government bonds. At the same time, the fund should control the drawdown by optimizing the investment portfolio and improving liquidity management to maintain the stable operation of the fund.

Do a good job of duration management

Optimistic about investment opportunities such as short-term bonds

Since the beginning of this year, bond fund sales have continued to be hot. According to data from Tianxiang Investment Consulting, in the first half of the year, bond funds grew by more than 1.6 trillion yuan, and the total scale exceeded 10 trillion yuan for the first time. According to Wind data, in the first seven months of this year, bond fund fundraising shares accounted for about 80% of the total issuance shares.

However, following rumors of suspending bond fund approval, the market recently heard news that regulators would provide guidance on the duration of bond funds.

In this regard, Liu Hao, fund manager of Minsheng Jiayin, said frankly that in the current environment, the original duration management framework does need to be adjusted. In addition to considering fundamentals, liquidity and other factors, policy guidance factors must also be considered.

Liu Hao further stated that from a fundamentals perspective, we need to pay attention to the extent and sustainability of the improvement in economic fundamentals, including further adjustments to real estate and local debt policies; from a liquidity perspective, local governments are expected to accelerate the pace of bond issuance in the third quarter, and the supply and demand relationship in the bond market may improve compared with the first half of the year, which will put certain pressure on the bond market; from a policy guidance perspective, we need to understand policy intentions and the regulatory consensus range, and follow the direction of policy guidance.

The aforementioned fund companies believe that in order to do a good job of duration management in the new market environment, it is necessary to pay more attention to the central bank's policies and market dynamics and flexibly adjust the duration structure of the investment portfolio. At the same time, it is also necessary to strengthen risk warning and response mechanisms to ensure that timely adjustments can be made when market fluctuations occur, thereby reducing the fund's risk exposure.

On the other hand, against the backdrop of "asset shortage", the previously hot bond market seems to have reached a crossroads.

In this regard, Wells Fargo Fund stated that compared with the past 10 years, the current bond interest rate center has a certain degree of decline. However, in the medium term, the domestic economic growth rate is still expected to remain at a certain level, bonds can still provide a certain coupon, and form a certain hedging relationship with other assets. Therefore, domestic bonds are still the cornerstone of asset allocation. In addition, as the risk-free interest rate declines, the yield created by bond assets will also fall. A diversified asset portfolio is conducive to improving the overall income experience, such as adding stocks, gold and overseas assets.

"Investors also need to adapt their mentality to the current changes. Returns and risks go hand in hand. While expecting increased returns, they must be aware that potential volatility is also increasing. In the era of comprehensive net worth, we must look at short-term asset price fluctuations with a more rational attitude." emphasized China Asset Management.

The aforementioned fund company believes that in the medium and long term, investors can focus on targets with stable cash flow, good fundamentals and low risk exposure, such as high-grade credit bonds, government bonds, policy financial bonds, etc. At the same time, they can also consider diversifying their investments in other asset classes to achieve diversified asset allocation.