10-Year Treasury Yield Drops Below 1.8%

The year 2024 in the bond market could best be summarized by the term "surpassing expectations." As it unfolded, the market witnessed remarkable dynamics, evolving through phases of bull market, volatility, and a renewed bullish trendBy December, the momentum had increasingly favored bonds, with the yield on the 10-year government bonds plummeting from 2% to below 1.8%, and similarly, the 30-year bonds also dipped beneath the 2% mark.

This ongoing rally pushed numerous bond funds to record highs, with data from Wind showcasing that out of 6,905 bond funds, a significant 3,250 hit historical net asset value peaks on December 16 aloneNotably, funds like Everbright’s medium- and high-grade bond fund, the Pengyang 30-year government bond ETF, and the ICBC Ruiying 18-month bond fund achieved annual returns exceeding 20%.

However, this sustained bullish trend inevitably raised concerns about diminishing value-for-money propositions and enhanced volatility in the bond market

At this juncture, a pressing question arises: is it still wise to invest in bond funds?

Recent public offering data reveals a surge in bond fund popularityAccording to Wind, as of December 16, 42 new funds were launched in December alone, collectively garnering nearly 742.9 billion yuan, with bond funds contributing over 80% of this incremental capital.

These bond funds emerged as popular choice this month, comprising all eleven funds that raised over 5 billion yuan eachThe number of effective subscribers mostly remained under a thousand, indicating that institutional investors were the primary drivers behind this shift.

Industry insiders suggest that the current sell-off in bond funds is attributable to both market momentum and a calendar effectAccording to GF Fund Management, since 2019, the bond market has displayed a consistent trend of profit-making towards year’s end

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This trend sees bond yields generally decline in December, leading to price gains, thus allowing those holding bonds to reap enhanced profits.

GF Fund elucidates that institutional investors gear up for an exemplary start to the new year, hence the rush to buy bonds towards year-endIf they were to wait until the following year for new acquisitions, they risk entering a market where prices have already risen substantiallyTherefore, rushing in at the end of the calendar year is common, which further amplifies buying activity.

Tang Hailiang from Morgan Stanley’s Fixed Income Investment Department notes that the recent rise in bond market yields above previous lows signals continuing strengthFollowing fluctuations in October and November, institutional strategies have been significantly adjusted, with substantial changes in interest rate levels and curve shapesThis shift indicates that with local bond supply easing and policy implementation becoming clearer, brokerages, funds, banks, and insurance sectors have engaged in reciprocal buying.

Despite this robust institutional interest, mounting fears surrounding the bond market's diminishing value proposition and rising volatility loom large

Longcheng Securities highlighted in a recent report that the current extreme sentiments and competitive trading behavior within the bond market have become exceedingly evidentOverzealous purchasing has rendered traditional measuring indicators almost obsolete, with frequent violations of critical interest rate thresholds.

The same report suggested that the bond market is currently exhibiting excessively aggressive behavior, leading to situations that resemble gamblingInvestors are increasingly pre-emptively positioning themselves for anticipated gains, resulting in a spiraling effect of competitive trading which could position the market for temporary declines moving forward.

In examining future trends within the bond market, China Europe Fund posits that under conditions of moderately loose monetary policy coupled with budgetary details yet to be announced, the bullish sentiment for bonds remains intact

However, substantial disturbances may arise from the first quarter's economic performance data and subsequent fiscal specifics as deliberated during the National Congress.

In the short term, recent weeks have showcased a market struggle as the 10 and 30-year government bonds broke through the 2% barrierPressure from declining longer-term yields now dips just below banks' liability costsFurthermore, the expectations for further interest rate cuts have already been primarily priced into the market.

Jinye Fund believes that recent policy changes are likely to yield a temporary easing in market constraints, bolstered by the central bank's liquidity maintenance effortsAs such, government bond issuance this year has not shown significant disruptions to the capital environment, sustaining a generally favorable atmosphere for the bond market amidst minimal shifts in economic fundamentals.

In reflecting on upcoming trends in the bond market, Tang Hailiang emphasizes the importance of rhythm in trading

On one hand, the ongoing bullish momentum is expected to retain its course, with monetary easing pacing ahead of credit easingUnder this framework, continued expectations for further declines in funding costs remainHowever, industries overly reliant on capital, such as real estate and city investment projects, may lose the previous feverish growth environment, gradually stabilizing the underlying fundamentals.

Conversely, the bond market faces the potential challenge of lower static yields coupled with increased volatilityThe compression of interest differentials may mean low yields exist across various types of bonds, prompting uniform strategies across institutional players and thereby provoking potentially extreme market movementsA sudden shift in expectations might magnify price volatility, making it increasingly critical to grasp the rhythm of the market moving forward as trading extremes could predictably inflate existing market risks.