Last week, the bond market, which had been steadily rising, suddenly hit a drastic brake, catching many investors off guardThe sharp turn in the market raised questions about the future direction of bond investments.

The catalyst behind this abrupt shift can largely be attributed to recent comments from the central bankTheir announcements served as a wake-up call, prompting many investors to sell off their holdings, sparking a significant market correction.

But does this mean the era of bull markets in bonds is over?

01

Adjustment or Reversal

In recent years, long-term bond yields have been on a continuous decline, primarily fueled by an "asset shortage." The future trajectory of the current bull market in bonds depends substantially on whether this narrative of asset scarcity changes.

Firstly, we need to assess the recovery of macroeconomic fundamentals.

For instance, in March, the manufacturing Purchasing Managers' Index (PMI) returned to the expansion zone, indicating robust supply and demand dynamics

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Additionally, a 5.3% year-on-year growth in GDP for the first quarter could signal that the economy is entering a recovery phase.

Hence, the PMI data for April will be crucialIf it continues to exceed expectations, it could disrupt the rationale for adopting a bullish outlook on the bond market in the medium to long term.

Historically, looking back over the past five years, the April manufacturing PMI has been in the expansion range from 2019 to 2021, while it has fluctuated in the contraction zone during 2022-2023. Nevertheless, in contrast to March data, the PMI for April has typically shown a downward trend, making it uncertain whether inflation will continue to rise.

Economic recovery is inherently a wave-like and tortuous processIn the medium to long term, while growth figures might be increasing, prices are decreasing, indicating weak demand for real economy financing

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On the flip side, the strong demand from financial institutions for bond allocations means that the bull market trend in the bond market remains intact.

Secondly, it is imperative to monitor the pace of bond issuance, particularly concerning local government special bonds and dedicated treasury bonds.

From the data on bond issuance this year, we observe that treasury bond issuance has not only kept pace but has exceeded levels seen in 2019 for the same periodHowever, the issuance of local bonds is considerably lagging compared to last year.

With local bond issuances sluggish, the demand for risk-free treasury bonds naturally replaces the focus which partly explains the significant drop in treasury yields this year.

In the government's work report from March, the introduction of special treasury bonds was proposed

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However, as of April, government bond issuance has yet to ramp up, creating substantial uncertainty about the timing and pace of issuance.

As for local bonds, an announcement on April 23 indicated that the special bond project selection for 2024 has been completed, suggesting that issuance may accelerate post-May, potentially creating some supply disturbances.

Furthermore, it’s crucial to remain vigilant regarding external influences, such as the ongoing communications from the central bank which have already exerted considerable effects on the bond marketSpecifically, this recent episode has had a direct impact on interest rates for bonds with maturities exceeding ten years.

02

Amidst the Market Plunge, Some Funds Remain Stable

This round of market adjustment has particularly targeted long-term interest rates

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For example, during the period from April 24 to April 26, two 30-year treasury bond ETFs experienced declines exceeding 2%.

Yet, in the face of the bond market's retreat, certain pure bond funds managed to buck the trend and even posted gains of over 1%.

In the first quarter, pure bond funds have observed a continual increase in duration across the board, with medium to long-term funds showing a duration increase between 0.36 to 2.45 years—a rise of 17.21%. However, most funds listed have durations below two years, indicating a general preference for shorter durations.

Notably, the top three bond funds primarily invest in convertible bonds while showing diminished allocations in interest-bearing bonds.

For instance, Minsheng Jianyin Xinxiang and Everbright Baode Xin Shengli both maintained around 70% of their portfolios in convertible bonds in the first quarter

Additionally, Huashang Convertible Bonds Select Fund, which primarily focuses on convertible bonds, even leveraged its holdings, with convertible bond allocations peaking at 110.23% in the first quarter of 2024.

However, one should take caution in case of Minsheng Jianyin Xinxiang, as this fund is still recovering from severe drops in net asset value due to prior missteps in real estate investments.

Subsequently, the fund manager was replaced by Xie Zhihua, a veteran with 12 years of mutual fund management experience, who joined Minsheng Jianyin at the end of 2021 and currently serves as the director of the fixed-income department.

Xie adopts a dual strategy focusing on risk management while also capitalizing on significant opportunities, especially excelling in convertible bonds with a skill for adapting asset allocations to manage volatility.

Since Xie's leadership over Minsheng Jianyin Xinxiang bond, the proportion of convertible bonds in the portfolio has markedly increased.

At present, the principal risk in the bond market lies in the consensus formed over the past period among investors believing in impending bullish trends