As December sets in, the bond market, which faced a significant adjustment earlier in the year, is beginning to show signs of recovery commonly referred to as the "year-end rally." On December 2, the yield on 10-year government bonds fell below the 2% mark, and the Zhongzhai Total Wealth Index has seen an increase of over 1% in the past month alone. Furthermore, it has been reported that nearly 99% of bond funds have recorded gains in this timeframe.

Despite this optimism, data indicates that fund movements still persist, with at least 20 bond funds experiencing large-scale redemptions recently, which has necessitated adjustments to their net asset value calculations.

According to Long Yuefang, General Manager of Fixed Income at Jin Ying Fund, the seismic shifts in capital flow resulting from rapid adjustments in the equity market appear to have peaked. Investors are beginning to return to a more rational framework, indicating that the surge in large-scale redemptions is likely in the past.

With the peak supply of government bonds for the year now behind us, combined with the traditional seasonal uptick in investment allocations at the year's end and start, experts express that the persistent demand amongst investors will continue to support the bond market. Xiong Yiming, Chief Macro Analyst at Wanjia Fund, emphasizes that while upward risks for interest rates exist, the trajectory for the bond market looks favorable.

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Recovery in the Bond Market Accompanied by Redemptions

Following the "924" rally that uplifted market sentiment in equities, the bond markets went through a series of adjustments. The Zhongzhai Total Wealth Index hit a maximum drawdown of -1.32% over seven trading days, marking a new low for the year. The sound of 'cracking eggs' was audible amidst the turmoil in bond funds. However, recent trends show that the bond market appears to be stabilizing and recovering.

On December 2, a promising performance was noted within the bond market, with the yield on 10-year government bonds dipping to 1.981%, breaking the crucial 2% barrier and marking a record low not seen in over 12 years. As of December 3, the Zhongzhai Total Wealth Index rebounded by 1.1% over the past month and increased by 0.55% since September 24, pushing the total increase for the year to 6.49%.

Consequently, the bond market has nearly regathered from the downturn witnessed at the end of September. With this recovery, many bond funds have begun to see an uptick in their net asset values. Data as of December 2 indicates that all 20 bond ETFs recorded gains, with the 30-year government bond index ETF and the 30-year government bond ETF leading the charge, showing increases of 0.84% and 0.79% respectively. Products such as convertible bond ETFs and central government bond ETFs also captured significant growth figures.

Taking a broader look, excluding newly established funds from the latter half of this year indicates that nearly 99% of existing bond funds achieved appreciable gains in the past month. Among them, 39 products realized growth exceeding 4%, with notable performers including Everbright Tianyi A, Fortune Optimized Enhancement A, and Xin’ao Credit Bond A rallying more than 6%.

Despite these improvements in performance, some bond funds reported significant redemption events. For instance, China Securities announced at the end of November that the Hong An Fund experienced a large buyback on November 29 and in order to protect the interests of fund holders from adverse effects on net asset value precision, they adjusted the net asset value precision for Class A and Class C shares to eight decimal places. Such incidents bear resemblance with trends from other funds as well.

Preceding this rebound, the bond fund sector had already been experiencing decreasing fund sizes for a while now. Figures from the China Securities Investment Fund Industry Association reveal that as of the end of October, the total volume of bond funds stood at 5.82 trillion Yuan, a decrease of 775.64 billion Yuan since September. Fund units also diminished from 5.82 trillion units down to 5.12 trillion, representing a reduction of 700.15 billion units.

In contrast, equity funds have consistently expanded, showcasing net increases of 71.44 billion units in October alone. The inflow of capital into ETFs reinforces the narrative for bond realignments, showing that funds continue to flow into the market. By December 2, more than 33 billion Yuan of net investment gravitated towards equity ETFs, with firms like Guangfa Fund, Nanfang Fund, Huaxia Fund, and Guotai Fund's CSI A500 ETF securing over 10 billion Yuan each in this capital inflow.

The Peak of Fund Movements Appears to Have Passed

As the year draws to a close, the yields on 10-year and 30-year government bonds are showing signs of downward fluctuation, suggesting a clearer recovery trajectory for the bond market. Questions linger though about how long this degree of fund migration will persist.

According to Long Yuefang, data from early November indicates a restoration of the seasonal scale for financial management, allowing bond funds to regain positive net subscriptions. He confirms that the worst impacts of the "seesaw" effect in fund allocation have passed.

Long elaborates that after the National Day holiday, an increased risk appetite in the markets resulted in A-share account openings surging to four to five times the typical monthly figures, inadvertently directing capital towards the equity market. This has placed pressure on bond yields, which saw skyrocketing rates and volatility due to subsequent redeeming impacts on financial products. However, stabilization has begun since mid-October for rate-sensitive instruments, with credit instruments witnessing a recovery in November.

Post these adjustments, the importance of liquidity management has become increasingly critical, especially for medium and short-term bond funds which need to focus more closely on liquidity oversight. The extreme compression of yield spreads means pursuing excessive duration extension is imprudent. To uncover excess returns, a more diversified trading strategy is necessary rather than solely relying on interest yields from lowered credit quality.

Lu Qiting, Assistant General Manager of Fixed Income at Yongying Fund, suggests that the market is presently in a watch-and-see phase regarding the effects of current policies. The significant pressures from redemptions that previously inflated bond yields are beginning to relent as investor sentiment stabilizes, allowing for some returns of investment subscriptions amidst decreasing bond yields.

"Recent decreases in interbank borrowing costs, coupled with a backdrop of debt restructuring, have rekindled interest in high-yield assets, improving sentiment among institutional investors for bond exchanges," argues Lu. However, any forthcoming economic stabilization post-policy implementations will need to be sustained, as pervasive effective demand remains relatively tepid, complicating any potential price recovery.

Xiong Yiming also emphasizes that recent self-discipline initiatives have aided in reducing interbank deposit rates and corporate lending rates, alleviating pressures on bank interest costs and finance costs. The responses to this have been clearly visible both within deposit note rates and the overall bond market rates, which are reflecting positive change, particularly with deposit note rates showing marked declines.

Furthermore, Xiong believes that the layout for year-end investing represents a crucial driver behind the interest rate downturn; in addition, the constant affirmations by the central bank in November regarding their maintaining accommodative monetary policies have provided further support for the bond market.

At this juncture, Xiong states that while current policy tilts remain proactive, the necessity for the central bank to further cut rates is salient for improvements in corporate profitability, stabilization in property markets, and gradual price recovery. He asserts that until there are sustainable boosts to the economy in sight, risks associated with interest rates appear relatively limited, and the prospect for the bond market remains on an upward trend.

Lu Qiting also anticipates that robust economic stimulus strategies will continue to be rolled out in the coming year to support growth. Further reductions in reserve requirements and interest rates remain plausible, highlighting a continued focus on fiscal policy aimed at debt restructuring to bolster economic stability. Given this backdrop, the bond market is expected to maintain a volatile yet downward-sloping interest rate trend moving forward, especially with medium to long-term credit bonds likely capturing significant interest.