Brief introduction of the guest and moderator
Ye Chao-ming
With 16 years of experience in the securities industry and 8 years of experience in fund management, he joined Penghua Fund in January 2014 and is now serving as Managing Director (MD)/General Manager of Cash Investment Department/Fund Manager. At present, there are 19 products under management, covering money market funds, short-term pure bonds, medium and long-term pure bonds, passive index bonds and flexible allocation funds, with a total management scale of more than 400 billion yuan, and rich experience in investment management.
Guo Shizhen
Bond researcher of the Fixed Income Research Department of Penghua Fund.
Ye Chao Ming Kim Phrase
1. The overall easing of funds provides a very good foundation for the bond market, and the asset shortage caused by the contradiction between supply and demand is also a very important reason for the rapid decline in the overall bond market yield, especially the very strong performance of ultra-long bonds.
2. In 2023, excess investment income can still be obtained by increasing the static coupon, but since 2024, the market has gradually shifted from static income competition to price difference competition, and the coupon strategy in the traditional sense has become a phased failure.
3. Traditionally, two of the three sources of income for bonds have been restricted, leaving only capital gains and spreads as sources of thickened income.
4. The coexistence of low interest rates and high volatility is a new feature of the current bond market, which requires us to gradually adapt.
5. The current real estate cycle has weakened, the old and new drivers have been transformed, and the complexity of the entire market analysis has increased significantly. The study of fundamentals needs to be continuously strengthened and deepened, not only considering some current changes, but also considering future trends, comparing changes in high-frequency data, and keeping a very close track of these data such as consumption and travel, real estate sales, and commodity supply and demand.
Guo Shizhen: At the beginning of 2024, the bond market performed well, attracting the attention of many investors and ordinary people. By the end of the first quarter, the China Bond Composite Index had risen 1.99%, and the yield on 10-year government bonds, an important benchmark in the bond market, also broke through a record low. But I have a puzzle for you, from a research point of view, the fundamental performance in the first quarter of 2024 is relatively stable and does not seem to support a sharp downturn in the bond market, how do you understand the divergence?
Ye Chaoming: Indeed, your observation is correct. Since the beginning of the year, these major economic and financial data have been relatively stable:
Judging from the economic data, consumption is still relatively resilient, and overall manufacturing investment has also made up for the impact of some declines in real estate investment. In terms of financial data, since the beginning of the year, the overall performance of social finance and credit data has also been in line with expectations, guided by the central bank's smooth pace of delivery.
The price level has remained moderately fluctuating within a reasonable range, and the fluctuations in CPI and PPI have been relatively small. Therefore, judging from the performance of some major indicators, the overall fundamentals have been in a moderate recovery since the beginning of the year, and it is indeed difficult to conclude that the bond market has experienced such a sharp decline from a fundamental perspective.
Guo Shizhen: Does this mean that there are other factors that dominate the performance of the bond market in the context of stable fundamentals, and how do you understand the main reasons behind the strength of the bond market?
Ye Chaoming: Indeed, I think that in addition to the fundamentals, there are several main factors that have caused the sharp decline since the beginning of the year:
First, overall monetary conditions remain very accommodative. At the end of last year, MLF continued to work in large amounts for two consecutive months and the RRR cut at the beginning of this year released about 1 trillion yuan of long-term liquidity. From the perspective of yields, whether it is treasury bonds or interest rate bonds, including the overall credit varieties, each maturity has fallen by 20-30BP, and the overall curve is flat. The overall easing of funds provides a very good foundation for the bond market, and the asset shortage caused by the contradiction between supply and demand is also a very important reason for the rapid decline in the overall bond market yield, especially the very strong performance of ultra-long bonds.
From the demand side, the overall trend of the equity market has been weak since 2022, and it has fluctuated greatly since the beginning of the year, resulting in a downward trend in the overall risk appetite of the market, which has also led to a relatively large growth in the scale of the overall fixed income varieties, and at the same time, various institutions in the market have consistent expectations for the downward trend of medium and long-term interest rates. In this case, ultra-long bonds can not only obtain capital gains but also relatively high coupon income, the overall cost performance is higher, and the launch of 30-year treasury bond futures last year has a very good promotion for the liquidity of this variety, under the combined influence of these factors, the market demand for ultra-long bonds is very strong.
Guo Shizhen: The demand side actually plays a big role.
Ye Chaoming: Yes, while the overall demand is very strong, the supply of high-interest assets is decreasing, and the continuous decline in loan interest rates may also squeeze out some credit bond financing demand in the process, and the overall pace of interest rate bond issuance has been slow since the beginning of this year. On the whole, on the one hand, the relatively strong demand for bond distribution is superimposed on the weak supply, and the shortage of bond assets has led to the persistence of the shortage of bond assets.
Guo Shizhen: Understood. In fact, interest rate is also a kind of price, supply and demand is the most basic factor affecting prices, as you mentioned in the first quarter of the bond market supply and demand pattern changes is a very important main line that leads to the decline of interest rates.
After the rapid decline in interest rates in the first quarter, some new characteristics have also emerged in the bond market, the first feature is that the interest rate pivot has continued to hit new lows, the lowest of 10-year treasury bonds has fallen to around 2.25%, and the lowest level of 30-year treasury bonds has exceeded 2.4%, all of which have reached the lowest interest rate level in history.
Ye Chaoming: Yes.
Guo Shizhen: At present, the performance of 30-year treasury bonds is very bright, and the interest rate spread between 30 years and 10 years is about 17bp. In terms of volatility, especially in February and March this year, the volatility of government bonds has been significantly amplified, and if you use the proportion of 30-day and 10-year treasury bonds that fluctuate more than 3bp in a single day, the proportion has increased from 3% at the beginning of this year to 23% recently, showing a situation of volatility amplification. I would also like to ask you, how to understand the low level of bond interest rates and the amplification of volatility, and why does the bond market show such new characteristics?
Ye Chaoming: Since the beginning of the year, the new characteristics of low interest rates and high volatility can be analyzed from the perspective of the main sources of bond income. Because bond income mainly comes from three aspects: the first is coupon, the second is leveraged arbitrage, and the third is the spread (capital gains).
Since the beginning of the year, from the perspective of coupons, the market has come to such a stage, and various interest rate spreads (credit spreads, term spreads, grade spreads, variety spreads, etc.) have been compressed to a relatively low position, and the space for continued compression is relatively limited. In the future, this relatively low level of interest rate spread may also be difficult to rebound sharply in a short period of time, and the static rate of return on assets has declined passively, and the yield on many credit assets is concentrated in the range of 2%-3%, and there are very few assets above 3%. In 2023, excess investment income can still be obtained by increasing the static coupon, but since 2024, the market has gradually shifted from static income competition to price spread competition, and the traditional coupon strategy has become a phased invalid.
From the perspective of leveraged arbitrage, there are still two factors restricting the sharp decline in the interbank funds rate. The first is the external side: the current U.S. economy is still resilient, there is uncertainty about the timing of the Fed's interest rate cut, the RMB exchange rate is still hovering around 7.2, and the current monetary policy needs to be considered to stabilize the exchange rate and stabilize expectations; Therefore, from these two perspectives, for the purpose of stabilizing the exchange rate and defending the rotation of the air against the epidemic, the central bank has no intention of reducing the price of funds, especially since the third and fourth quarters of last year, the price of funds represented by DR007 has actually remained fluctuating around the policy rate of 1.8%. Considering that the interest rate spread of short-end assets, including certificates of deposit, is relatively narrow to the price of funds, and the yield curve is relatively flat, the room for increasing income through leveraged arbitrage in the traditional sense is relatively narrow. Therefore, the second source of income has also been relatively phased failure.
Guo Shizhen: The sources of income from leverage are relatively thin.
Ye Chaoming: Yes, so traditionally, two of the three sources of income for bonds have been restricted, leaving only capital gains and spreads as a source of thickened income. Different entities face different constraints, for example, the stickiness of bank deposit interest rates is still relatively strong, and short-term interest rates may be inverted like liabilities, so banks also tend to choose to invest in long-term bonds to game capital gains; insurance institutions will increase their investment in ultra-long bonds when the overall return on assets declines; 。 Among these long-term bond investors, especially when the interest rate falls to a relatively low level, the allocation power will be relatively scarce, and other major participating institutions may be more likely to be dominated by trading orders, in this case, everyone's behavior is more convergent, and it is more likely to cause market volatility. Therefore, the coexistence of low interest rates and high volatility is a new feature of the current bond market, which requires us to gradually adapt.
Guo Shizhen: Based on the new characteristics of low interest rates and high volatility in the bond market that we mentioned earlier, do we, as investors and researchers, need to constantly update and iterate our personal research framework? Based on my daily tracking and research experience, I also found that the cyclical nature of the fundamentals has been declining in recent years, and in this regard, you can observe the PMI year-on-year indicator. In the cycle from 2009 to 2013, the fluctuation range of the indicator was -20% to +68%, and in the three cycles from 2013 to 2023, the fluctuation range of the indicator was -10% to +20%, but since 2023, the fluctuation range of the indicator has been compressed to -10% A relatively narrow range to around 0 indicates that the volatility and cyclicality of the economy are declining. How do you understand that the correlation between fundamentals and bond markets may be weakening, and how do we update and iterate our investment research framework?
Ye Chaoming: In terms of research, the traditional research framework that relies on fundamentals has undergone some changes in recent years, especially since this year: generally speaking, the traditional analytical framework of the bond market includes the study of fundamentals, policy and capital. Generally speaking, the trend of medium- and long-term interest rates may be more influenced by fundamentals and policies.
Guo Shizhen: More relevant.
Ye Chaoming: Yes. In fact, since the beginning of this year, the market's overall response to fundamental and policy changes has been blunted to a certain extent. Taking the impact of inflation as an example, the typical transmission path before 2015 was transmitted by the demand side, and generally saw the overall rise in the price of final consumer goods, which would have an impact on nominal interest rates. However, in recent years, whether it is the pig cycle or the fluctuations caused by the dual carbon policy, the impact of the supply side often only brings changes in the individual indicators of CPI or PPI.
Guo Shizhen: It's not a comprehensive impact.
Ye Chaoming: Yes, we don't see a full price increase, so the impact on bond yields is getting weaker and weaker.
A similar situation has emerged in terms of financial data, which has previously been very forward-looking, and can predict changes in the financing of the real economy, thus staying ahead of the fluctuations of the economic cycle. However, in recent years, we have found that policy tends to smooth out such volatility, and some of the guidance of financial indicators has also declined significantly.
So, I think the deeper reason behind this phenomenon may be the weakening of the cyclical nature of real estate fluctuations. Before 2021, real estate was an important pillar of the economy, and fluctuations in real estate investment were prone to trigger cyclical fluctuations in the economy, so bond yields would change cyclically every 3-4 years in previous years. However, after 2021, the relationship between supply and demand in the real estate industry has undergone some changes due to the transformation of old and new kinetic energy, and the performance of the real estate-related market is still at a low level even after continuous policy optimization. In such a context, investors pay more attention to the changes in the medium and long-term trend, and slowly ignore some short-term policy stimulus effects, and the market performance is not so sensitive to policy and fundamentals, especially in the short term, the upward range of interest rates will indeed be somewhat suppressed, so it shows a continuous long-term bull trend.
Guo Shizhen: Understood. Based on this, can you give us some suggestions on how to update the Iterative Interest Rate Bond Investment Framework?
Ye Chaoming: In the face of this situation, I think the influence of some traditional analysis factors is weakening, and our research framework really needs to be constantly updated according to the actual situation. At present, the real estate cycle is weakening, the old and new drivers are changing, and the complexity of the entire market analysis has increased significantly. I believe that the study of fundamentals needs to be continuously strengthened and deepened, not only considering some current changes but also future trends, comparing changes in high-frequency data, and keeping a very close track of these data such as consumption and travel, real estate sales, and commodity supply and demand.
Guo Shizhen: We still need to pay close attention to fundamentals.
Ye Chaoming: Yes, after all, fundamentals determine the general direction and trend of interest rates. On this basis, it is still necessary to jump out of such a framework in some short cycles and think directly about this issue from the perspective of bond supply and demand.
Guo Shizhen: I understand that the behavior of institutional investors has an increasing impact on the market. From the perspective of the main participants in the bond market, including both allocation-oriented institutions such as banks and insurance, as well as transaction-oriented institutions such as brokerages and funds, what kind of behaviors do you think different types of investors present, and what is the main impact on the bond market?
Ye Chaoming: First of all, as we have just analyzed, the current market is facing an environment with relatively low interest rates but relatively high volatility, and the market is more likely to ask for profits from trading. For example, public funds are now facing relatively large relative ranking pressure, and in an environment with low interest rates, they have to focus on swing trading as a strategic focus, and the high volatility of the market and the consistent behavior of trading institutions are mutually causal.
Second, commercial banks have always been the largest participants in the bond market, and the scale of rural commercial banks buying bonds has increased significantly over the years, but some of the habits of rural commercial banks in trading may be significantly different from those of non-bank institutions to buy bonds: non-bank institutions often operate through the right side, while rural commercial banks may buy more through the left side, for example, when the bond market pulls back, rural commercial banks will increase their buying efforts, which to a certain extent plays the role of a "cushion" in the entire market.
Third, insurance funds are also an important allocation force for bonds, especially medium and long-term bonds, due to the stability of the entire premium income and the increasingly stringent regulatory requirements, in recent years, they have also participated more in the bond market, playing a very important marginal force at the end of the year and the beginning of the year.
Guo Shizhen: In the interest rate market, in addition to the downward trend of the interest rate center, the shape of the interest rate curve has also undergone obvious changes, and the whole curve tends to flatten. As of the end of March, the 10-1 year spread, 10-3 year spread and 10-5 year term spread of Treasury bonds were at the 30%, 16% and 4% quantiles of history, respectively. In the face of a relatively low interest rate and a relatively flat curve in the bond market, how do we invest in interest rate bonds?
Ye Chaoming: I think the following aspects may be more important:
First of all, it is necessary to grasp the relatively large trend market in time. Recently, perhaps because the overall interest rate is relatively low, the central bank's expectation management is relatively strong, and the interest rate has changed faster than in previous years. Therefore, in such a new environment, we want to pay more attention to investment research when investing in interest rate bonds, and seize opportunities more decisively and in a timely manner when the market starts.
Second, when interest rates are low across the board, capital gains are needed to provide a source of excess revenue, and it is crucial to increase the overall weight and capacity of transactions in the process. The current highly volatile market environment provides a lot of short-term swing trading opportunities for exchange-traded institutions, and we can increase the income of the portfolio through continuous efforts and continuous short-term trading.
Thirdly, you can also enrich the entire trading strategy to thicken the portfolio to a certain extent. At present, the investor structure is relatively rich, the intraday volatility is relatively large, and the activity of bonds with different interest rates has increased significantly.
Guo Shizhen: As you mentioned earlier, along with the decline in the interest rate pivot, the static coupon has also been declining, which puts forward higher requirements for the trading ability of fund managers. How do you increase product returns by improving your trading capabilities in your daily portfolio management?
Ye Chaoming: Yes, I think everyone's ideas, methods and strategies for trading are different, the important thing is to find a set of better trading strategies that suit you, and keep trying, iterating and updating. This process varies from person to person, and there is no one-size-fits-all approach that works for everyone.
Guo Shizhen: It needs to be constantly polished, and it varies from person to person.
Ye Chaoming: Yes, I also have a few personal experiences to share with you.
First, it is important to grasp the main line of the transaction. Because bond market transactions usually revolve around a main line in stages, such as RRR and interest rate cuts, fiscal policy, real estate policy, economic data, and so on. Most of these factors have a certain regularity, and it is very important for us to effectively analyze and grasp them before the start of this kind of trading market. Therefore, in this process, it is necessary to explore some possible expectation differences in combination with market pricing, and lay out the main line of the next stage of the transaction in advance, and the way to achieve such a goal is to discover opportunities through the team's continuous high-frequency collision and communication.
Second, it is important to judge liquidity. The price of funds determines the lower bound of yields, and liquidity tightened from August to November last year, which is actually a big reason for the rise in yields on bonds, especially short-term bonds. In the current context of the weak elasticity of the entire fundamentals, the yield of the bond market has hit a record low, and the market dominated by trading behavior, the impact of liquidity conditions on the market has gradually increased.
Third, it is important to observe and track market sentiment. At present, market participants can be divided into transactional institutions (such as funds, brokers) and allocation institutions (including insurance, banks, etc.). The upper limit of bond yields may be determined by allocations, and the lower limit may be determined by trading. By tracking the daily trading behavior of various types of institutions, combined with the turnover rate and bond yield points, we can perceive the market trading sentiment and judge the short-term trend. For example, when exchange-traded institutions are the main buying force, the turnover rate is very high, and the yield is falling rapidly, which often means that the market is already relatively congested, and the sentiment may be more fragile, in this case, the possibility of short-term yields rising will be relatively large.
Guo Shizhen: It's like a reversal indicator.
Ye Chaoming: Yes, in this case, it may be necessary to properly consider taking profit, which is the third aspect.
Fourth, it is important to track and analyze interest rate spreads. Because the spreads of various varieties and maturities usually fluctuate within a range, we use the bonds with higher spreads to replace the bonds with lower spreads through tracking and analysis of interest rate spreads, looking for some certainty in uncertainty.
Finally, quantitative models are continuously introduced to assist. The bond market trend has a relatively strong trend effect and also has the characteristics of mean reversion. At present, we have also been trying to build different quantitative models for different nature of funds to assist in daily judgment.
Guo Shizhen: Everyone is also very concerned about the follow-up trend of the bond market, and here I would like to talk about my personal views on the follow-up market:
Overall, the fundamentals in the second quarter are expected to remain at a low level, and China's economy is in a period of structural transformation between the old and the new, but the upward elasticity of the economy may not be enough. On the domestic demand front, we are mainly concerned about real estate, infrastructure and manufacturing. The relationship between real estate supply and demand has changed significantly, and the real estate policy is expected to gradually and further relax in the second quarter, but from the perspective of investment or new home sales, it may not have reached the bottom conditions, and infrastructure and manufacturing investment is expected to maintain a high growth rate to hedge some gaps in the real estate sector.
Secondly, in terms of domestic demand, from the perspective of the rhythm of infrastructure investment, the source of funds for infrastructure investment in the first quarter was mainly the issuance of additional treasury bonds last year, and fiscal expenditure may be in a state of weakening and strengthening from the second quarter. Therefore, the pace of infrastructure construction may also change to a certain extent. The second aspect of domestic demand is consumption, and the overall consumption of residents is running smoothly, but it may be limited by some expected influences, wealth effects and income growth, and the growth rate of residents is relatively stable, but the overall volatility is not large.
External demand in the second quarter is worth paying attention to, overseas central banks have started to cut interest rates, and now the fundamentals of the United States are quite resilient, from the perspective of the global manufacturing PMI, there are also signs of bottoming out, and external demand in the second quarter is expected to maintain a relatively good performance. On the whole, the fundamentals in the second quarter are still at a low level and stable, which is not enough to form a very obvious negative factor for the bond market.
From the perspective of macro policy, the central economic meeting at the end of last year and the "two sessions" showed that the policy is still in a state of "not strong stimulus", and the current economic target of about 5% is expected to be achieved in the first quarter.
In terms of domestic monetary policy, I believe that it may continue to be in the loose range, and the reduction of the financing rate of the real economy will continue, and the reduction of the deposit rate and LPR in the second quarter can still be expected. Therefore, monetary policy and capital are expected to form a strong environment for the bond market.
Of course, as you mentioned earlier, the impact of institutional transformation on the bond market is very important, and the bond market was also dominated by institutional behavior in the first quarter, especially the pattern of "too much money" by institutions and the slow supply of government bonds has formed a situation of "asset shortage" in stages. In the second quarter, I believe that the situation of "asset shortage" in the bond market will continue. Some banks, especially rural commercial banks and wealth management, may become the main allocation force in the second quarter, and some banks and insurance companies are even facing a certain "undermatch".
Therefore, regarding the overall view of the bond market, I think the bond market is likely to be in a volatile range in the second quarter. Would you like to ask for your thoughts on the bond market in the second quarter?
Ye Chaoming: Yes, in the general direction, I still agree with the view that the shock is strong that you just mentioned. From the perspective of the fundamental environment, the overall market in the second quarter is still in a relatively favorable environment, and the factors that may lead to further downward interest rates in the process include:
1) Whether there may be a seasonal weakening of consumption, including investment, on the demand side, which is historically more likely to occur in the second quarter. Therefore, whether from the perspective of expectations or "asset shortage", both long-end and short-end interest rates may have a further downward trend on the current basis.
2) Supply factors, according to the overall treasury bond issuance plan for the second quarter announced at the end of March, the scale of single bond issuance has increased to a certain extent, and the superimposed ultra-long-term treasury bond issuance plan is undecided. In this context, whether the central bank may release liquidity in advance by cutting the reserve requirement ratio to cooperate with the issuance, if the monetary policy is to reduce the interference expectations of the entire supply, or whether the market will trade this factor before the entire supply is increased, I think it is indeed possible to become a factor for further downward interest rates.
Guo Shizhen: I understand, so from the perspective of the second quarter, what potential risks do you think we should pay attention to?
Ye Chaoming: Our overall view may be that the volatility is strong, and we are not particularly sure that the entire market is still a bull market environment in the second quarter, which does imply some possible risk factors that need to be considered or constantly tracked, mainly in two aspects:
1) At present, the absolute yield of the entire market is low, taking the implied AAA medium note as an example, the current 1-year yield has been in the quantile of more than 10% since 2019, and it is lower in 3 and 5 years, which may be within 2%; If the market does not go down, there is a risk that a correction will be triggered by changes in expectations for many of these factors.
2) It is not simple to achieve this year's growth target, so it is not excluded that the second quarter of the credit policy will be increased, such as equipment renovation, three major projects, etc., and at the same time, the fiscal policy will be cooperated, and the fundamentals and PMI and other economic data will continue to improve, which will also reverse the pessimistic expectations of the market.
3) Supply, especially the concentrated issuance of ultra-long-term treasury bonds, and if the monetary policy is not fully coordinated as the market or we expected, it will cause a relatively large phased pumping of liquidity, and it is difficult for the allocation demand of insurance and other institutions to immediately digest the negative of this supply volume, and in this case, the weakening of the supply and demand pattern will also lead to the possible risk of spontaneous rise in interest rates.
Source: wind.
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