Another Downturn Looms for Bank Wealth, Bond Funds?

Adjustments in the Bond Market

The bond market has recently experienced a period of turbulenceFor instance, on August 12, the main contract for the 30-year treasury futures fell below 110 yuan, marking a decline of 1.24%. Similarly, the 5-year treasury futures dropped by 0.34% and the 10-year treasury futures saw a decrease of 0.62%. This decline in treasury futures has also translated into a drop in the cash market for government bonds.

The decrease in bond prices has inevitably impacted the unit net value of bank wealth management products and pure bond funds, causing noticeable volatility.

This adjustment phase in the bond market is primarily attributed to concerns raised by the central bank regarding the persistently low yields on long-term treasury bonds

In the latter half of this year, the central bank has repeatedly warned about the interest rate risks associated with long-term treasury securities, indicating that current yields are uncharacteristically low.

On July 1, the central bank even borrowed government bonds from state-owned banks in preparation for potential market intervention; meanwhile, on August 7, four rural commercial banks in Jiangsu province faced investigations for alleged manipulation of government bond pricesThe end result has been a noticeable adjustment in the longstanding price increases of these long-term bonds.

Reflecting back to November 2022, the bond market had gone through a significant correction, marked by drastic declines in bond prices which severely impacted bank wealth management schemes and pure bond funds, resulting in enormous drops

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Such declines challenged conservative investors, with some products losing a week's worth of gains in merely a day, and a month’s worth of gains in a month’s timeMany bank wealth management products and pure bond funds fell below their face value, making it painfully clear to investors that the bond market harbors risks.

In response to those declines, investors continued to redeem their bank wealth management products and pure bond funds, prompting institutional investors to sell off their bond holdings, leading to further decreases in bond pricesThis pattern of collapse did not stabilize until after March 2023, leading to a shrinkage of over 2 trillion yuan in bank wealth management products.

So, the pressing question arises: will this recent adjustment in the bond market result in another crash similar to the one witnessed in late 2022 for bank wealth management schemes and pure bond funds?

From a probabilistic standpoint, such an outcome is certainly feasible, but the likelihood seems relatively low given the current market environment compared to the end of 2022.

Firstly, at the end of 2022, bank deposit rates were comparatively high, with the rate for large-denomination time deposits at 3.25%. Funds flowing out from bank wealth management products and pure bond funds could still find their way into deposits

In fact, the start of 2023 noted a significant spike in deposits.

In contrast, the current 3-year deposit rate generally hovers below 2.4%, and issuance of large-denomination time deposits has become scarce, indicating an outflow of savings.

Secondly, loan interest rates have seen significant reductionsFor example, at the end of 2022, the mortgage rate for first-time homebuyers in Shanghai was set at 5%, which has since plummeted to around 3.4%. Given that the risks associated with mortgage loans exceed those of treasury bonds, it follows that mortgage rates must surpass treasury yieldsAt present, many cities have their first mortgage rates close to 3%, making it improbable for the yields of long-term treasury bonds to exceed 3%.

Lastly, the central bank remains committed to reducing financing costs for the real economy

Hence, it seems unlikely that the central bank would allow substantial surges in long-term treasury yieldsIf yields were to rise excessively, the central bank could step in and purchase treasury bonds, stabilizing the market—a maneuver that was not available at the end of 2022.

In light of the fluctuations in the bond market, how should investors in bank wealth management and pure bond funds react? First and foremost, investors must confront market volatility head-onWith the fluctuations in bond yields, the net asset values of wealth management products and pure bond funds will undoubtedly experience variability, necessitating a calm approach from investors.

Given the limited room for interest rate hikes, the net value loss for these two categories of products is anticipated to remain manageable

Thanks to the bond interest returns, long-term holding of these products can still offer profitability.

Additionally, transitioning medium to long-term investments into short-term products can be a strategic moveSince medium to long-term products are more susceptible to interest rate fluctuations, opting for short-term products may yield lower but more stable returns, enhancing the overall investment experience.

Lastly, abandoning the market due to a temporary decline will only perpetuate lossesMany financial products that experienced steep declines at the end of 2022 have since regained their losses and continue to reach new highs.

With the lessons learned from past experiences, it's likely that investors will approach short-term market fluctuations with greater composure.