Intensive policy releases before the holiday lead to inevitable bond market adjustments

At the beginning of September, as overseas markets experienced turmoil and domestic interest rates once again "challenged" new lows, the 10-year government bond yield broke below the 2.10% threshold, and the 30-year government bond yield fell below 2.20%. However, as the month progressed, first came the unexpected stimulus policy "package" from the central bank at the September 24th press conference held by the State Council's Information Office, followed by the Politburo meeting on September 26th to study economic work, which led investors to once again have high expectations for additional policies. In response to significant changes in domestic macro policies, the market began to shift from a "weak reality" to a "strong expectation." Before the National Day holiday, A-shares only took three trading days to reach 3,000 points. After three consecutive trading days with transaction volumes exceeding one trillion yuan, the "egg collectors" from the bond fund next door began to have some concerns.

Exploring the reasons behind the market fluctuations, they mainly come from the following aspects:

① Adjustments in real estate policies, reducing the interest rates on existing mortgages and unifying the minimum down payment ratio for mortgages.

② The central bank stated that it would create swaps for securities, funds, and insurance companies, supporting eligible securities, funds, and insurance companies to obtain high-liquidity assets such as government bonds and central bank bills from the central bank through asset pledges, which will greatly enhance their ability to obtain funds and increase their holdings of stocks. Special re-lending will be created to guide banks to provide loans to listed companies and major shareholders, supporting stock buybacks and increases.

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③ The Politburo meeting set a positive tone, and the market has certain expectations for the introduction of subsequent fiscal policies.

④ After a long period of rising interest rates reaching historical lows, as the macro environment facing the bond market becomes more complex, the pressure to take profits further amplifies the fluctuations.

The market trend is not over, and deposit interest rates are adjusted downwards

Regarding the impact of the above disturbances, historical experience tells us that a trend reversal in the bond market requires economic data to show continuous improvement on a quarterly basis, or a shift in monetary policy towards tightening.

From a fundamental perspective, a significant characteristic of this economic cycle is that the expansion of credit for individuals and businesses will proceed in waves alongside the transition of new and old drivers of growth. Although adjustments in real estate policies are certainly beneficial for improving expectations, it will take a considerable amount of time for them to actually boost real estate sales and further transmit this to the economic chain.The current situation is that after experiencing a rapid decline in the second quarter, the total demand is now fluctuating at a low level. With policy support, some short-term data, such as consumption, may rebound first, which will then support the slowing down of the economic downturn slope. However, relying solely on consumption and supply efforts is still insufficient to fundamentally change the direction. Subsequently, more attention should be paid to the intensity and arrangement of fiscal policy, and rely on policy to convert into physical work volume to feed back to the economy. From the perspective of monetary policy, as we mentioned earlier, the market is still in the stage of policy introduction, and there is no significant physical work volume yet, far from the stage of monetary policy shift. Moreover, the recently concluded Politburo meeting also clearly stated "to increase the intensity of counter-cyclical adjustments in fiscal and monetary policies, to reduce the reserve requirement ratio, and to implement a strong interest rate cut."

In September, the central bank lowered both the MLF and 14-day reverse repo rates by 30BP, exceeding expectations, demonstrating a "strong interest rate cut." At the same time, the reserve requirement ratio was reduced by 50bp, releasing 1 trillion long-term liquidity, which will also smooth the volatility of the fund market in the fourth quarter. In addition, the central bank also indicated that it would consider lowering the reserve requirement ratio by 25-50bp later, reflecting the intention to stabilize funds. It can be determined that the trend of monetary policy easing is still the main trend. From the perspective of institutional behavior, against the background of low leverage in bond investment this year, the spontaneous profit-taking of profit-taking plates is difficult to form a further downward reflexive force.

The bond bull market does not easily speak of turning direction.

In summary, from historical experience, the signal of the bond market reversal has not yet appeared, and the shortage of funds is also an important force to stabilize interest rates. Even if there is short-term pressure, with the implementation of reserve ratio cuts and interest rate cuts, and the expectation of follow-up interest rate cuts, the overall direction of bond market yield decline has not changed.

After the National Day holiday, the market gradually calmed down, and the seesaw between stocks and bonds tended to be balanced, with the bond market stabilizing after a sharp decline. In addition to the market's spontaneous stabilization, on October 18, the long-awaited new round of deposit rate cuts was implemented before the upcoming adjustment of existing mortgage loan interest rates, bringing direct support to the bond market. This is also the second round of deposit rate cuts within less than three months after July this year, the sixth active deposit rate cut since September 2022, and from the adjustment range, this adjustment is more intense than the last round. Among them, the listed interest rates of demand deposits of major banks were generally reduced by 5BP, and the listed interest rates of different terms of time deposits were all reduced by 25BP.

Looking ahead, given the weak fundamentals and the incremental policies within the year are still mainly focused on risk prevention and bottom support, the bond bull market does not easily speak of turning direction. The short-term回调 in the previous two weeks provides a good entry point for interest-bearing bond investment, and the key to driving the market in the short term lies in the fund market.

Seize the opportunity of the bond market and pay attention to the benchmark Treasury ETF!

From a medium and long-term perspective, China's economy is transforming from a high-speed growth stage to a high-quality development stage, and the driving force and model of economic development are undergoing a profound change.

There is an inherent difference in the dependence on debt financing between the old and new economies, and the economy also needs a low-interest-rate environment to help. In the era of economic transformation, when we carefully consider the objective allocation needs of market investors, as well as many other far-reaching medium and long-term factors, it is not difficult to find that the bond market is still in a relatively favorable environment.

In terms of bonds themselves, they are still worth planning from the perspective of asset allocation and holding for a long time. On the one hand, deposit interest rates continue to decline, and the expected returns of traditional deposits and financial products may be unsatisfactory. Investors can look towards bond funds with relatively lower risk levels. On the other hand, as market risk preferences decline, investors tend to seek stable investment channels. Bond funds, especially those invested in interest-bearing bonds and high credit-rated credit bonds, are considered relatively safer investment options.In addition to actively managed bond funds, participation in bond market investment through indexation is also increasingly gaining market recognition. Among them, bond ETFs have outstanding tool attributes, and with the advantages of convenient trading, low fees, and transparent holdings, they have also become an important tool for investing in the bond market.

As of September this year, the overall scale of bond ETFs has broken through the 100 billion yuan mark! In the future, as the advantages of the varieties are gradually recognized and accepted by the market, domestic bond ETFs will also usher in a broader development space.

Average daily turnover exceeds 1.9 billion yuan

The benchmark government bond ETF (511100) is a featured product in the current market that covers multiple key duration government bonds. Since it was listed and traded on December 25, 2023, it has been actively traded, with an average daily turnover exceeding 1.9 billion yuan!

The benchmark government bond ETF (511100) mainly tracks the Shanghai Stock Exchange benchmark market-making government bond index, selecting all government bonds within the scope of the SSE benchmark market-making variety list as constituent bonds. Specifically, it selects about two of the most recently listed bonds from government bonds with terms of 1 year, 2 years, 3 years, 5 years, 10 years, 20 years, 30 years, and 50 years, with a current number of constituent bonds of 18, adjusted regularly every month, and is a comprehensive medium-term government bond index.

Based on the medium and long-term view that interest rates are still in a downward channel, investors can actively allocate the benchmark government bond ETF (511100) to conveniently achieve investment in a basket of government bonds, balance the capture of interest rate opportunities on both ends, and diversify term risks caused by liquidity, fundamentals, and other factors.

Compared with equity products, the benchmark government bond ETF (511100) only participates in bond market investment and has lower volatility risk. Compared with credit bond products, the underlying focus of the benchmark government bond ETF (511100) is on government bonds, which have obvious credit safety. Compared with other existing government bond ETFs in the market, which are mostly fixed duration, concentrated in medium-term, long-term, and ultra-long-term, the benchmark government bond ETF (511100) has a comprehensive duration, regularly adjusts its holdings and replaces old and new bonds monthly, which can help investors avoid the cumbersome operations of selecting and replacing bonds on their own. Compared with off-exchange bond indices, the benchmark government bond ETF (511100) also has the advantages of high efficiency in T+0 redemption, more convenient trading, transparent holding information, inclusion in the scope of securities lending funds and exchange pledge bonds, and low transaction costs.

In addition, against the backdrop of the "Bank Capital Management Measures" clearly requiring banks to penetrate the risk weight measurement of assets invested by their own business, the underlying assets of the benchmark government bond ETF (511100) are clear, and the investable assets are clear, occupying a clear advantage in the authorized measurement method. It is a good choice to meet the penetration requirements of the new bank capital regulations. Overall, in a market full of uncertainties, the benchmark government bond ETF (511100) provides a more convenient and more accurate tool for customers with lower risk preferences, government bond allocation, or market-making needs.