Morgan Stanley Fund has shared insights on the current financial landscape, emphasizing the certainty of short and medium-term debt assets under supportive monetary policies and accelerated fiscal spending. The firm sees trading and speculative opportunities in long-duration assets, with rate and perpetual bonds balancing potential returns and liquidity.
In the remainder of the year, domestic asset reactions are expected to be influenced by domestic policy expectations and implementation. Despite the anticipated fluctuations in asset categories, the debt market has priced in expectations regarding fiscal policy. A substantial supply shock is unlikely due to supportive central bank policies, maintaining a low six-month bond rate below current deposit rates by 5 basis points.
As fiscal spending is realized, systemic liquidity is expected to improve, potentially expanding the operational bounds of bond assets. Key meetings, including the Central Economic Work Conference, will outline economic development strategies and fiscal plans for the coming year, suggesting continued speculative opportunities in the debt market.
The low interest rate environment amplifies volatility, with narrow interest margins prompting institutions to extend durations and explore credit opportunities. This trend is evident in short-term bond funds, which balance returns and drawdowns, appealing to retail customers as deposit interest rates decline.
By the third quarter of 2024, short-term bond funds reached 1.28 trillion but decreased by 212 billion from the previous quarter. Retail clients are increasingly purchasing bond funds, surpassing institutional clients due to enhanced internet information dissemination. Meanwhile, pure bond funds held by financial subsidiaries dropped to an estimated 700-800 billion by October 2024, reflecting enhanced market forecasting and redemption patterns.
The entrenched logic of urban investment debt and asset shortages has flattened interest spreads, making it difficult for institutions to achieve desired safety return ratios. The bond market's traditional levers—coupon, leverage, and duration—face challenges amid a shifting preference landscape among institutional investors.
Since the end of September, policy support has spurred a bullish equity market, while the debt market has experienced rapid jolts due to liability and risk appetite shifts. Recent redemption waves were handled more adeptly than past events, illustrating improved market resilience.
The DR007 rate stabilized near 1.6%, while two-year AA+ assets with liability management features yield around 2.36%, offering clear arbitrage opportunities. Short and medium-term debt assets exhibit low volatility and high certainty, with ongoing opportunities for duration assets in light of forthcoming policies and meetings.
