This magazine is specially invited丨Zhuang Zheng
In 2023, the domestic bond market as a whole showed a bull market, with the China Bond New Composite Wealth (Total) Index rising by 4.66%, and the performance of bond funds at 2.76% significantly better than 2.11% in 2022, mainly because the economy showed a weak recovery, while inflation remained at a low level.
Although 2024 is likely to be a good year for bonds, when analyzing the strategy of fixed income products in 2024, the author believes that we can refer to the comparison between the Chinese and US bond markets: the current interest rates of Chinese and US Treasury bonds have been inverted for a long time, and the current yield on China's 10-year Treasury bonds is 2.57%, and the yield on US 10-year Treasury bonds is 3.79%. Sellers expect China to emerge from deflation in 2024 and the U.S. interest rate hike policy will shift to interest rate cuts, so it may be difficult for the domestic bond base to outperform the U.S. bond base in 2024.
Institutional low-risk appetite is the result of
In 2023, the performance of the bond base will underperform the China Bond Index
Discerning investors should be able to spot that the China Bond Index rose 4.66%, but the bond fund only rose 2.76%; What is the reason behind the underperformance of bond funds in the China Bond Index?
First, we believe that the contribution of bond fund allocation is limited. As we know, the China Bond New Composite Index is a broad-based index that reflects the price trend of the onshore RMB bond market, and its sampling is all bonds publicly issued in the onshore bond market, weighted by the market value method. Weighted by the market value method, the current balance of credit bonds (mainly including urban investment and state-owned enterprises) accounts for 15.98% of the whole market, and interest rate bonds (mainly including treasury bonds and financial bonds) account for 59%, but the proportion of public bond base allocation is as high as 44.32% of credit bonds and only 52% of interest rate bonds, and the interest rate of credit bonds is usually higher than that of interest rate bonds, especially after the issuance of 1 trillion special treasury bonds, the price of credit bonds will rise sharply in the second half of 2023. However, at the end of the year, the return of bond funds was lower, and it can be judged that the bond base has benefited from this "mismatch" of bonds.
Secondly, it is dragged down by duration. If the portfolio method is used to calculate the duration of the bond base, the average duration of bond funds has dropped significantly since 2023: it has dropped from 1.42 at the beginning of the year to 1.19, which is at a historically low quantile level; The average market capitalization duration of the China Bond Composite Index (Wealth) is 5.08. In the context of increasing volatility in the equity fund market, lowering deposit interest rates and declining yields of money market funds, the proportion of stocks and equity funds is negatively correlated with the proportion of bond funds, money market funds and deposits.
Since 2023, institutions and residents have significantly reduced their risk appetite, and they are reluctant to take too much long-term risk even in bond allocation. In particular, when institutions account for nearly 85% of the share of bond funds, the risk appetite of institutions is actually lower than that of residents, which is undoubtedly the main reason why the bond base underperforms the bond index.
During the year, the passive debt base was slightly better than the active debt base
The popularity of the issuance indicates that the prospect of fixed income indexation is promising
Towards the end of the year, there was a frequent explosion in the issuance of bond funds, especially the index bond base. According to the data, the share of new bond issuance in December accounted for nearly ninety percent of the new fund issuance in the month, of which there were nearly 20 bond bases with an initial offering scale of more than 2 billion yuan, especially the passive index bond bases such as Huaan China Bond 0-3 Year Government and Financial Bond Index, GF China Bond 0-2 Year Government and Financial Bond Index, and JPMorgan China Securities Interbank Certificate of Deposit AAA Index 7-day holding, all of which raised more than 5 billion yuan.
Since it is difficult to do alpha in the bond market, this makes the importance of index bond-based products with clear styles and outstanding instrument attributes increased. In 2023, from the perspective of risk and return, there is little difference between the index bond base and the active bond base. According to statistics, the average return of 209 passively managed bond funds is 2.79%. As for why broad-based bond indexes such as the China Bond New Composite Index perform better than passive index bond bases, the main reason is that the index varieties tracked by passive index bond bases are mainly interest rate bonds, which are mainly treasury bonds, CDB bonds, and policy financial bonds, and the maturity is generally short, mostly 1-3 years. This type of fund has the advantage of low fees and high transparency, but it is often inflexible.
In comparison, the average yield of 2,877 actively managed bond funds since 2023 is 2.76%, and as mentioned above, the average duration of the bond base is only 1.19. The first thing for active bond managers to consider is that they should not hold bonds with too long duration for an average holding period of less than a year, but should make excess returns in bonds with short duration. In addition, the active debt base needs to be able to cover higher management fees. Statistics show that the average management fee of 2,877 actively managed bond bases is 0.3604%, while the average management fee of 209 passive bond bases is 0.1726%, a difference of about double.
Compared with actively managed bonds, passive index investment in bonds has the advantages of low taxes and fees, high transparency and high degree of diversification. In the future, the development of the mainland passive bond base will still have strong vitality, mainly because: 1. Compared with mature markets, the scale of the mainland passive bond base is small; 2. It is difficult to achieve excess returns on the bond base, and it is necessary to find a new business development model, and reducing costs and indexing products are active directions; 3. Indexed products have a rich investment group and can be used as an allocation tool; 4. The investment scope of bond index funds is highly correlated with the index compilation method, which meets the transparency requirements of investment institutions.
U.S. Treasury funds may have considerable returns under the expectation of interest rate cuts
In addition to how to choose between active and passive bond bases, another thing that needs to be considered in 2024 is to invest in domestic bonds or U.S. bonds.
Domestically, the current interest rate curve is flattening and term spreads are low due to the decline in long-term interest rates. This form may improve the cost performance of short-duration bonds, and if you have not held a long-term bond base before, there is no need to allocate them in 2024. Overall, monetary policy may continue to be loose in 2024, but the economic recovery will drive up commodity prices, and the bond market, especially credit bonds benefiting from the 1 trillion special government bonds, will be more complicated. The target of the bond fund may be to pay attention to the actively managed Caitong Anrui short-term bond A, Shanxi Securities ultra-short-term bond fund A, etc.; Passively managed Haifutong CSI Short-term Financing ETF, Bosera China Bond 0-3 Year CDB ETF, etc.
Considering that the current stock-to-bond income ratio has been at a historical high of about 3.6 times, and the equity price has significant allocation value, investors with a certain risk tolerance can also consider appropriately allocating secondary bond bases, such as Industrial Opportunity Bond A, IB Income Enhancement, and Xinao Credit Bond.
At present, the market expects the United States to cut interest rates three times in 2024, and there are opportunities for overseas bond bases, especially those held by U.S. bonds and other targets. Investors can also buy long-term U.S. Treasury bonds to lock in the current high interest rate and high interest rate yield, even if the capital gains are declining, they can still obtain substantial coupon income. Domestic investors can choose J.P. Morgan International Bond RMB (cumulative) (968052. XG), which has a high correlation coefficient with the 10-year Treasury bond. If you want to hedge exchange rate risk, investors can further consider JPMorgan International Bond Hedging Cumulative (968050. XG）。
At present, the choice of domestic funds that invest directly in U.S. bonds is still limited, so investors with U.S. dollar funds can choose the TLT ETF, which tracks the long-term U.S. Treasury bond index and diversifies its investment in long-term U.S. Treasury bonds with a maturity of more than 20 years, which is one of the most important U.S. Treasury bond ETF targets.
(This article was published in Securities Market Weekly on December 30, 2023.) The views in this article only represent the author's personal and do not represent the position of this journal. The funds mentioned in this article are for example only and are not intended as a recommendation to buy. ）