**Introduction**: Policy "Combination Punch" Leads to Bond Market Correction, Public Funds' Latest Assessment
Under the "seesaw" effect of stocks and bonds, the "bull market in bonds" comes to an abrupt halt!
Following the implementation of a series of major policy "combination punches," the A-share market surged, while the bond market experienced a significant correction. Yesterday, the closing of government bond futures was across-the-board green, with the 10-year and 30-year government bond futures main contracts both recording the largest decline in over a month.
Several industry insiders have stated that after the release of a series of favorable policies, the bond market's profit-taking sentiment has fermented. It is important to pay attention to the potential adjustments in the short-term bond market due to the rise in risk preference and the alternation of fiscal policy expectations, but the long-term investment logic remains unchanged.
**Bond Market Correction Under Policy "Combination Punch"**
After the introduction of a series of policy "combination punches," the bond market began to adjust, with the decline in government bond futures expanding. At yesterday's close, the 30-year government bond futures main contract fell by 0.99%, and the 10-year government bond futures main contract fell by 0.24%, both marking the largest decline in over a month.
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"The short-term bond market may face significant downward pressure for several reasons: First, the negative correlation between stocks and bonds means that during periods of high-risk asset surges, the bond market performs poorly. This is especially true given the concentration of a large amount of capital in the past period, which exerts pressure for capital outflows. Second, in terms of long-term policy direction, the government is guiding long-term capital into the stock market for index-type passive investments, and some insurance funds may subsequently reduce their allocation to long-term government bonds and increase their allocation to stock indices. Third, new monetary tools are bearish for the bond market, especially for short-term debt: if non-bank financial institutions use financial assets such as stock index ETFs as collateral to exchange for short-term debt, central bank bills, and other highly liquid assets from the central bank, the supply of such liquid debt assets in the secondary market will increase, suppressing the bond market," said a fixed-income investment research person in Shanghai.
The aforementioned fixed-income investment research person analyzed that, based on historical performance, after the policy interest rate adjustment, the government bond rate will reach a new low. Extrapolating by 20 basis points, the 10-year government bond corresponds to a point of 1.8%. If we look at the low point of the interest rate after the last rate cut, which was 2.1%, then the subsequent low point is seen at 1.9%.
A fixed-income investment director at a medium-sized fund company in Beijing pointed out that after a package of policies was implemented, the bond market saw a large-scale profit-taking, and the extent of profit-taking exceeded expectations. The main reason for the bond market's decline is related to the profit-taking sentiment and the fermentation of expectations for economic improvement. The subsequent market trend depends on changes in risk preference, that is, whether the continued rise in the stock market will put enough pressure on the bond market. The short-term bond market may face profit-taking correction pressure, but the long-term investment logic remains unchanged.
Several industry insiders have expressed that, overall, the resolute support attitude of monetary policy is further demonstrated, and a good monetary policy environment is conducive to the stable operation of the bond market. At the same time, they remind that the short-term bond market may face significant downward pressure and to be vigilant about the risks of adjustment.For the bond market outlook, the fixed income team at HSBC Jintrust Fund believes that the implementation of reserve requirement ratio (RRR) cuts and interest rate reductions is relatively more conducive to the decline in short-term interest rates, while the expectations for supporting fiscal and other incremental policies may cause some disturbances to long-term interest rates. Overall, funds with medium to short maturities are relatively more benefited. In addition, the creation of special re-lending for share buybacks and the establishment of securities fund insurance swap tools have to some extent boosted the sentiment of the equity market, which may favor the performance of secondary bond funds with relatively higher risk preferences.
Guotai Fund stated that the financial regulatory authorities' unexpected easing this time is conducive to enhancing market risk appetite, which is more favorable for short-term debt, while the benefits for medium to long-term debt are relatively limited. They maintain a cautiously optimistic attitude towards the current bond market but need to lower expected returns. Although the yield level of the bond market has declined significantly compared to the beginning of the year, the factors supporting the decline in yields have not changed fundamentally, and reducing the cost of实体 financing remains an important task for the financial system.
"Against the backdrop of improved macroeconomic expectations, restored confidence in the equity market, and increased probability of incremental fiscal policy implementation, the bond market, especially long-term debt, may face pressure. Subsequent trading in long-term debt may gradually become more rational, and long-term bond yields will return to a reasonable range," Xinyuan Fund suggests maintaining a cautious attitude towards long-term debt and participating in the market when policy uncertainties dissipate and long-term bond yields adjust appropriately. For short-term debt, RRR cuts and interest rate reductions help alleviate the current tight sentiment in the money market, releasing the pressure of the inversion between funding rates and short-end bond market yields. Therefore, the safety of the short end of the bond market is relatively high, and the adjustment pressure is relatively limited.
Xingye Fund believes that in terms of fixed income, the downward shift of the interest rate center will drive the downward movement of the entire spectrum of interest rates. The long end has previously responded sufficiently to RRR cuts and interest rate reductions, and the introduction of a package of measures may drive a phased profit-taking. In the future, it is necessary to pay attention to whether there are incremental policies in the fiscal and real estate sectors. If there are, the previously low risk appetite may rebound. Considering the time difference between the implementation of RRR cuts and interest rate reductions and official announcements, the abundance of liquidity is relatively certain. At this stage, funds, certificates of deposit, and other varieties still have a high cost-performance ratio. In the future, as deposit interest rates continue to be adjusted downward, wealth management products are expected to attract incremental fund inflows. Credit bonds that have performed poorly in the past, especially super-long credit bonds, have a certain room for catch-up growth in the future.