China's bond fund market, which saw substantial growth earlier this year, experienced a contraction for the first time since the start of 2023. At the end of the third quarter, the bond fund scale reduced to 10.25 trillion yuan, a drop of over 330 billion yuan from the second quarter. Experts suggest that despite this downturn, there are still promising opportunities in the bond market, driven by expectations of continued monetary policy easing. Investors are advised to monitor fiscal and monetary policies closely and maintain flexible investment strategies.
The decline in bond fund scale was primarily observed in September. The Chinese economy's improving outlook and new policy announcements led investors to shift towards equity assets, influenced by the stock-bond balance dynamic. As bond yields dipped to new lows, equities became more attractive, prompting a reallocation of assets.
The passive bond fund market, however, continued to grow, surpassing one trillion yuan for the first time by the end of the third quarter. This growth is attributed to the lower management and custody fees of passive bond funds, their transparency, and ease of trading, as investors favor these characteristics in a low-interest-rate environment.
While passive bond funds offer lower costs and clear investment objectives, they lack flexibility and struggle to meet personalized investment needs. This rigidity contrasts with actively managed funds which can dynamically adjust portfolios but have faced challenges in achieving excess returns due to reduced interest rate fluctuations.
Looking ahead, the bond market is expected to focus on central bank policies as the People's Bank of China actively works to maintain liquidity stability. With supportive monetary policy, the likelihood of significant risks in the bond market remains low. Additionally, measures like interest rate cuts and lower housing loan rates are anticipated to support the market's stability.
The macroeconomic policy environment emphasizes steady growth and consistent policy, which aids in reducing long-tail risks and bolstering market confidence. Although short-term volatility is expected, especially in rates bonds, the long-term outlook for the bond market remains positive, with institutional investors continuing to show interest in passive bond funds due to their lower risk weight under new capital regulations.
In managing bond investments, a neutral to defensive strategy focusing on a balanced allocation between rates and credit bonds is advisable. Credit bonds, particularly those from banks, state-owned enterprises, and local government financing vehicles, are favored for their lower credit risk. Investors are encouraged to remain vigilant about policy directions and maintain strategic flexibility.
