Recent bond market fluctuations have generally increased, with regulatory authorities' continued attention to speculative long-term bonds significantly impacting the market, leading to a noticeable steepening of the Treasury yield curve.

Over the past week, Treasury bonds with maturities of 1 to 3 years have declined by 1 to 2 basis points (BP), while 7 to 10-year Treasury bonds have risen by approximately 2 BP, with the 10-year Treasury reaching 2.17% and the 30-year Treasury reaching 2.36%. They have not yet recovered to the lows seen in August (2.11% and 2.34%, respectively).

The volatility in the bond market in August also notably affected the net value of wealth management products. As of August 14, there were 7,171 pure fixed-income public mutual fund products in existence (with each share of the product counted separately). Among those that disclosed net values after August 9 and on the 9th, approximately 15.29% of the products experienced negative returns for the week.

In the next 1 to 2 months, institutional sources interviewed anticipate that the bond market will be more volatile, and the impact of fluctuations in the net value of wealth management products on investors will continue. The interest rates for 10 and 30-year Treasury bonds have not been significantly adjusted, and their cost-effectiveness is not high. However, in the next phase, as the pressure on the renminbi exchange rate eases, the central bank may have more room for further monetary easing. Traders do not believe there are significant risks in the bond market. Affected by last week's expectations of changes in the policy for existing mortgage loans, bond yields have already declined. Nomura China's Chief Economist, Lu Ting, told reporters that the central bank may encourage banks to cut interest rates on about 25 trillion yuan of existing mortgage loans by about 40 BP, saving borrowers 100 billion yuan in interest expenses per year. However, it is unlikely to allow borrowers to transfer mortgages between different banks, which would lead to intense competition among banks and further compress the net interest margin.

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Bond market volatility and fluctuations in the net value of wealth management products have increased the volatility in China's interest rate bond market, with the central bank's actions affecting market sentiment.

In early August, the correction in the bond market was particularly evident. On the 12th of the month, the main contract for 30-year Treasury futures fell by 1.11%, the 10-year main contract fell by 0.59%, and the 5-year main contract fell by 0.34%. On the 8th, the main contract for 30-year Treasury futures fell by 0.52%, and the 10-year main contract fell by 0.27%.

Relevant data shows that as of August 14, there were 7,171 pure fixed-income public mutual fund products in existence (with each share of the product counted separately). Among those that disclosed net values after August 9 and on the 9th, 2,878 products were reported, with 440 products experiencing a decline in net value in the past week, meaning that approximately 15.29% of the products with more recent net values had negative returns. There were a higher number of negative returns for short-term pure fixed-income products, with four institutions having more than 40% of their products in floating losses. However, the returns on fixed-income wealth management products over the past year have still been considerable, generally ranging between 3% and 5%. In contrast, by the end of August, nearly 80% of equity public mutual fund products were in negative territory.

Overall, the adjustment range of pure fixed-income wealth management net values remains controllable. According to the team led by Tan Yiming from Minsheng Securities, the overall net value breakage rate of wealth management products is still at a low level, and there has been no significant redemption of wealth management products recently. Moreover, after experiencing a significant correction in the middle of August, the bond market stopped falling and started to rise on August 13, to some extent indicating that the cost-effectiveness of bond assets has once again become prominent. Compared to the 2022 wealth management redemption wave, the current market may not have the basis for a significant adjustment.

However, it is worth noting that the yield of most interest rate bonds has not yet returned to the lows of August, and subsequent institutions believe that the net value of wealth management may continue to fluctuate.Wang Qiangsong, head of the research department at Nan Yin Wealth Management, told reporters that the weak fundamentals have been largely priced in, but the expectation of stable growth policies is heating up, coupled with the strengthening of the exchange rate, it is necessary to pay attention to the rebound in market capital risk appetite, which may disturb the bond market in the short term. In addition, the impact of recent fluctuations in wealth management net value on investors is still ongoing, and it will take time for wealth management products to stabilize. The bond market should focus on counter-cyclical policies as well as the central bank's buying and selling of government bonds and institutional behavior.

He stated that over the past week, the yield curve of government bonds has become steeper. In the secondary market, secondary funds had a net sale of 72.4 billion yuan, securities firms had a net sale of 63.9 billion yuan, insurance companies had a net purchase of 101.3 billion yuan, rural financial institutions had a net purchase of 96.2 billion yuan, and large commercial banks and policy banks had a net purchase of 140 billion yuan; insurance and rural financial institutions are increasing leverage, while funds and securities firms are reducing leverage. Large commercial banks and policy banks have stabilized market sentiment with net purchases for two consecutive weeks.

Under the policy expectation, the "bond bull" has not yet ended.

Despite the increased volatility in interest rate bonds, the expectation of policy easing still exists, and the community does not believe that the "bond bull" has completely ended.

The latest data shows that in August, the sales of the top 100 real estate companies decreased by 22.1% year-on-year and 2.43% month-on-month, and the real estate market still needs improvement; the manufacturing PMI in August was 49.1%, down 0.3 percentage points from the previous value. In the PMI sub-indicators, both production and new orders have weakened, but export orders are still acceptable.

Due to the market's expectation of increased stimulus policies, interest rate bonds have strengthened slightly over the past week, especially the expectation of interest rate cuts for existing loans, which drove the rise in stocks and bonds on Friday. The market is looking forward to whether there will be a new round of actions in the traditional peak season of "Golden September and Silver October" for real estate policies. In addition, the central bank announced its net purchase of government bonds for the first time, releasing a clear signal to control the yield curve shape with "buying short and selling long," but the market also interpreted another layer of meaning, that is, the monetary expansion model is changing, and buying government bonds to inject base money may become the norm in the future.

Lu Ting told reporters that there is a possibility of interest rate cuts for existing mortgages, but the central bank is unlikely to allow borrowers to transfer mortgages between different banks. The reason is that transferring mortgages will inevitably lead to fierce competition between banks and further compress the net interest margin of banks.

"Since the narrowing of the net interest margin has become the central bank's main concern, the difficulty of transferring mortgages is relatively high. In fact, as early as August 2019, when the central bank announced the reform of the loan market quotation rate (LPR), it clearly stated that the transfer of personal housing loans for mortgages was strictly prohibited."

From September to December 2023, the interest rates on existing mortgages have been significantly reduced. According to the central bank's estimates, during this period, the interest rates on more than 23 trillion yuan of outstanding mortgage loans were reduced by an average of 73 basis points to an average level of 4.27%. About 53 million households have benefited from this adjustment, with a total annual interest expenditure reduction of 170 billion yuan. Nomura believes that the central bank may continue to reduce the interest rates on existing mortgages because the Central Political Bureau meeting in July promised to expand domestic demand in the second half of the year, focusing on promoting consumption.

According to institutional calculations, in most cities, the range of mortgage loan interest rates for new homebuyers is from LPR-85BP to LPR-45BP, while most existing mortgage loans have an interest rate of LPR+10BP, and there is still a significant gap between the two. However, given the pressure on banks' interest margins, some analysts remain cautious.In comparison, a more certain trend lies in the anticipation that as the Federal Reserve is about to embark on a rate-cutting cycle, the space for China's overall policy interest rate cuts may be further opened. Currently, market pricing indicates a cumulative rate cut of 225 basis points, with the expectation that interest rates will bottom out in the second quarter of 2026.

CICC believes that if the US dollar weakens, the depreciation pressure on the Chinese yuan will also ease. For the People's Bank of China, the priority of "stabilizing the exchange rate" can be relatively postponed, while the priority of supporting the domestic economy can be moved forward. This opens up further space for monetary policy relaxation, which will to some extent drive the short-end interest rates in the money market to fall further, and thus opens up the downward space for the current bond yield curve.

Moreover, the potential weakening of the US dollar will not only release the space for domestic monetary policy relaxation but also, to a certain extent, stimulate the willingness of enterprises to exchange currency. The increase in currency exchange demand can indirectly enrich the yuan deposits, especially corporate deposits, providing support for yuan liquidity, which may point to a decline in the central bank's interest rate.

Data obtained by reporters from major institutions show that the current mainstream institutions' estimates of the extra foreign exchange hoarding by exporters are all below 500 billion US dollars. At the same time, the average cost of the "excess" US dollars hoarded by exporters is estimated to be slightly below 7.1.

Credit bonds' cost-effectiveness gains more attention

At the current stage, compared with the volatile interest rate bonds, the cost-effectiveness of credit bonds is beginning to receive more attention from institutions.

Wang Qiangsong said that currently, one can consider investing in credit bonds first, and then in interest rate bonds. After half a month of adjustment, the interest rates of credit bonds have generally risen by about 20 basis points, and the value of credit bonds has rebounded, which can be allocated on demand when prices are high. The interest rates of 10-year and 30-year government bonds have not been significantly adjusted, and their cost-effectiveness is not high, so they can be temporarily excluded. Because recently, the overnight funding rate DR001 has returned to around 1.5%, coupled with the credit callback, the cost-effectiveness of leverage strategies has significantly improved.

Eric Liu, the Asian fixed income portfolio manager of AllianceBernstein, told reporters that, benefiting from a relatively moderate inflation and policy environment, the performance of Chinese government bonds has been steadily leading that of the US and Europe over the past three and a half years. Foreign capital has been continuously flowing back into the Chinese bond market since September 2023, and he is optimistic about China's credit bonds.

Observing historical trends, policy easing often leads to a significant narrowing of credit spreads, as was the case when the Federal Reserve adopted quantitative easing policies from 2008 to 2020. AllianceBernstein expects that as interest rates continue to fall, the credit spreads in the Chinese bond market will also narrow.

Although the real estate sector performed poorly in 2024, other industries performed well, including technology, green economy-related industries, and finance. Eric Liu believes that credit bond investors have a dual advantage—the overall economic environment promotes the possibility of further interest rate cuts by the government, and for industries that have already performed well, there is also an opportunity to enhance growth potential. Currently, institutions are mainly focusing on sectors such as cyclical consumer goods, banking, state-owned enterprises, technology, and public utilities.