Recently, there has been a heightened focus on the bond marketTraditionally, fixed income has been a strong point for brokerage asset management, and reporters from China Securities recently interviewed major asset management institutions to unravel the logic and influences behind the recent fluctuations in the bond market.

Overall, many securities firms believe that the bond market will remain relatively positive in 2025, although greater volatility is anticipatedSome investment managers have candidly stated that the cost-performance ratio for bond market allocations in 2025 is declining.

Regarding the recent declines in yields on 10-year and 30-year government bonds, certain institutions argue that the decrease in risk-free rates might facilitate funds returning to riskier assets such as stocks

In terms of product layout, "fixed-income plus" remains one of the key focus areas for many brokerage asset managers this year.

Increased Volatility Expected in 2025 Bond Market

"From the perspective of asset allocation, the cost-performance ratio of the bond market in 2025 has significantly decreased," said Tang Jun, Chief Investment Manager of the Portfolio Investment Department at Zhongtai Securities, in an interview with China Securities reporters.

Tang Jun elaborated that the specific trajectory of the bond market in 2025 will likely depend on the relative intensity of monetary easing versus fiscal expansion: if monetary easing is more aggressive, interest rates may continue to decline, leading to a bull market in bonds; conversely, if fiscal stimulus becomes more decisive and exceeds expectations, the bond market may reach its peak.

A relevant personnel from Guoxin Asset Management indicated that by 2025, the external environment's uncertainty is likely to intensify, and China's monetary policy is set towards "moderate easing," with potential for cuts in reserve requirements and interest rates still possible

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Thus, the logic behind the bond bull market remains validHowever, they also noted that China's fiscal policy will be more active, with considerable increases in government bond supply anticipated, resulting in increased market volatility; the extent and slope of yield declines are expected to narrow compared to 2024.

A representative from Guojin Asset Management shared with reporters that, while the bond market in 2025 could still hold relative positivity, substantial volatility is anticipated, with investment strategies in the bond market looking to seize opportunities amidst this instability.

According to their analysis, in the short term, monetary easing is clear, and the market expectations for continued interest rate cuts in the first quarter of 2025 are quite high

The bullish sentiment in the bond market is likely to remain strong; though there is potential for fiscal measures to exceed expectations later, the transmission of policy impacts on the economic fundamentals takes time, and pre-emptive actions by authorities could limit the negative impacts of fiscal policy on the bond market in the short runCurrent interest rates have already embedded expectations of a 30-40 basis points cut; once the expectations for expanded fiscal and monetary policies are priced in, the bond market may face certain low-level profit-taking pressures.

According to a representative from Guangzheng Asset Management, as the earlier stable growth policies take effect and bond yields trend towards relatively low levels, 2025 is likely to be a year marked by increased volatility in the bond market

Investment opportunities may primarily arise from credit spread compression, interest rate band trading, and a resurgence of sentiment in convertible bonds.

Looking ahead to 2025, Guangzheng Asset Management believes that the combination of profit-taking activities after the year-end and the pressure from allocation decisions will lead to a generally oscillating interest rate environmentIf cuts in reserve requirements and interest rates see effective implementation, it might result in a scenario where all favorable news is absorbed, but from a medium-term perspective, corrections could present buying opportunitiesOverall, the phenomenon of asset scarcity may transition into a scarcity of returns; amid a context of increasing debt, the supply of rate-bearing bonds might remain large, while the supply of coupon-bearing assets could continue to contract, leading the market to seek coupon returns and compress spreads.

A representative from Caitong Asset Management noticed that the macroeconomic environment for the bond market remains predominantly favorable

China's fundamentals are affected by uncertainties in the external environment; at the same time, China’s risk prevention and economic stabilization necessitate a further decline in broad interest ratesUnder a backdrop of moderately loose monetary policy, proactive measures from the central bank for rate cuts are also anticipated in 2025, indicating further room for declines in bond yields.

"As for credit bonds, under the current real estate cycle and default resolution cycle, the 'asset scarcity' pattern for credit bonds is unlikely to significantly alleviateWe believe there is still value to participate in current credit varietiesIn terms of convertible bonds, we expect a potential for valuation correction in the convertible bond market in 2025, presenting notable opportunities," conveyed a representative from Caitong Asset Management.

Declining Risk-Free Rates Likely to Favor Capital Flows Back to Riskier Assets like Stocks

Recently, the yields on 10-year and 30-year government bonds have continued to decline.

In response, a representative from Guojin Asset Management explained to reporters that the improvement in the bond market can be primarily attributed to substantial pressure on the economic fundamentals, coupled with policy efforts to support the economy

While the scale and effectiveness of fiscal policy still possess some uncertainty, the overarching trend of monetary easing is firmly in place, leading the market to preemptively trade on the potential for the central bank's future rate cuts"The overall trend for bond market yields in 2024 is expected to be a single downward trajectory, but in 2025, the market conditions will be more complicatedThe market may oscillate between reality and expectations, and increased volatility is anticipated."

A representative from Guoxin Asset Management agrees, asserting that the core driving force behind the recent strength of the bond market is the expectation of relaxed monetary policy and the seasonal allocation demands from institutionsThe adjustment of the monetary policy tone to "moderate easing" at the December meeting, with an explicit indication of "timely rate cuts," has led institutional investors to rush in response to these easing expectations, thereby driving yields lower

Furthermore, there tends to be seasonal allocation demand from insurance, banks, wealth management, etc., from December to the following year's first quarter, further boosting the bond market.

This individual noted that since last December, government bond yields have dropped to historically low levels, resulting in several implicationsFirstly, as government bond yields decline, investors start searching for "value gaps" in other bond typesFor instance, the performance of recent "perpetual bonds" and ultra-long-term local government bonds has been strongSecondly, as static bond yields prove insufficient to cover the cost of liabilities, investors may turn to trading to derive capital gains, which heightens market volatility.

Tang Jun noted that the bond market has consistently strengthened over the past two years, with interest rates continually hitting new lows

The primary driving forces behind this trend are expectations of monetary easing and a slowdown in credit expansion.

Furthermore, Tang noted that falling interest rates imply a decrease in risk-free returns, effectively lowering the opportunity cost of holding other riskier assetsTheoretically, this should enhance the valuation levels of these risk assetsConversely, a lower interest rate environment is conducive to encouraging both individuals and businesses to increase leverage, thus stimulating credit expansion and the recovery of the real economyHistorical examples from countries like the U.Sand Japan indicate that paired with strong fiscal policy, monetary easing that reduces interest rates could quickly bolster public and business confidence, allowing for a rapid recovery of credit expansion.

"Reflecting on 2024, the primary momentum behind interest rate declines stemmed from an asset scarcity driven by weaker fundamentals

The rapid strengthening of the bond market recently is mainly attributed to market anticipations around monetary easing in the first quarter and a temporary absence of negative factors due to declining supply," remarked the representative from Guangzheng Asset Management.

This individual analyzed that the impacts of declining risk-free rates manifest across multiple dimensionsFor instance, from the perspective of fundamentals, falling long-term rates could lower the issuance costs of government and local bonds, easing financial burdens on both governments and companies, and enhancing the financial system's ability to support the real economyFrom an institutional behavior standpoint, the demand from institutions for longer-duration assets has led to relatively high durations, which may elevate market vulnerability

In extreme cases of negative surprises, a herd behavior could amplify market volatilityAdditionally, from the perspective of capital flows, if yields on long-term bonds decline, leading to diminished expected returns from fixed-income products, it may prompt a capital migration back towards higher-value assets like bank deposits and stocks.

“Fixed-Income Plus” Becomes a Focus for Industry Allocations

Interviews with multiple brokerage asset management firms suggest that in 2025, "fixed-income plus" will remain one of the key business areas for many asset management institutionsNotably, some brokerage firms indicated they will actively seize investment opportunities arising from the recovery of the stock market and prioritize low-mixed products combining bonds and stocks.

For instance, a relevant person from Guangzheng Asset Management informed reporters that in 2025, the company intends to actively capture investment opportunities from the stock market rebound and will focus on low-mix products that blend bonds and stocks, as well as equity products with a major focus on technology innovation

They are planning innovative products that combine major asset classes such as fixed-income, equity, futures, and derivatives into low-volatile, all-weather products that can traverse single asset cycles, in tandem with quant-based strategies that bet on increased volatility.

"Although bond yields are on a downward trend, investor expectations for asset yields have not diminished significantlyTherefore, we will enhance our investment strategies focusing on "fixed-income plus" products," stated a representative from Guoxin Asset Management.

In the pure bond portion, they plan to emphasize credit bonds as a foundation to boost yields with convertible bonds and interest rate trading

In the augmentation aspect, they will leverage brokerage asset management's capabilities for allocating and trading across major asset classes, increasing investments in convertible bonds, public REITs, dividend-bearing assets, ETFs, derivatives, and cross-border assetsGuoxin Asset Management also highlighted its commitment to an absolute return investment philosophy, striving to capitalize on relatively assured market opportunities and to avoid turning "fixed-income plus" into "fixed-income minus."

Relevant individuals at Guojin Asset Management mentioned that the company will focus on fixed-income products while continuously optimizing strategies regarding cash management and credit bond allocation, aiming to solidify the foundations and enhance product competitiveness, and provide customers with stable returns