Overseas Rate Cut Expectations Decline, US Bond Funds' Heavy Holdings Fall, China's Bond Market May Not Have Reached Reversal Yet

Over the past week, significant changes have occurred in the overseas bond market. Influenced by the retreat of expectations for a 50BP rate cut by the Federal Reserve in November, U.S. Treasury yields have rebounded sharply, which also implies a decline in the prices of related bonds. Although the net value changes were not recorded during the National Day holiday, it should be noted that many U.S. Treasury bond funds have seen a noticeable drop in the value of their heavily weighted bonds over the past week, which may drag down their net values. Compared to overseas markets, China's bond market has not yet reached a turning point. Although the stock market has attracted some funds from the bond market, the room for improvement in the economic fundamentals remains key to supporting the bond market.

U.S. Treasury yields rebound sharply, and the prices of heavily weighted assets in U.S. Treasury bond funds decline.

Last week (9.30-10.6) coincided with the National Day holiday, during which several changes occurred in the overseas capital market. Particularly, the weakening expectations for a Fed rate cut had a significant impact on the overseas bond market. Against the backdrop of a sharp rebound in U.S. Treasury yields, the prices of heavily weighted assets in a number of Chinese U.S. Treasury bond funds have continued to decline.

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According to the non-farm employment data released by the United States, the better-than-expected non-farm employment data for September in the U.S. reflects an increased probability of a soft landing for the U.S. economy. The market expectation for a 50BP rate cut by the Federal Reserve in November has noticeably retreated, thereby driving a sharp rebound in U.S. Treasury yields and a strengthening of the U.S. dollar index. Wind statistics show that the yield on 10-year U.S. Treasury bonds rose by 23 basis points to 3.98%, and the U.S. dollar index rose by 2.1% to close at 102.5.

Generally speaking, the weakening of rate cut expectations is also seen as the warming of another rate hike expectation. In terms of market trading sentiment, this means that future interest income is expected to increase, and investors are more inclined to invest funds into high-yielding assets with existing supplies. This leads to a decrease in bond demand and a decline in prices.

Looking at the heavily weighted assets of many Chinese U.S. Treasury bond funds, this point is not hard to find. Taking the Huitianfu Selected U.S. Dollar Bond A U.S. Dollar Cash as an example, the mid-year report for this year shows that the heavily weighted bonds "UST 4 1/8 2/27" and "UST 4 7/8 4/26" both saw a decline of more than 0.5% over the past week, with the former falling by more than 0.78%.

In addition, QDII bond funds such as ICBC Global U.S. Dollar Bonds, Fullgoal Global Bonds, and Yinhua U.S. Dollar Bond Selection have also experienced significant price drops in the heavily weighted bonds previously announced. Since the fund's net value is related to the combined net value of the related asset portfolio, a decline in prices will also lead to a decline in asset net value, and there is a possibility of a retreat in the unit net value during the period.

In addition to the rebound in U.S. Treasury yields, the yields on government bonds from many countries around the world have also shown a rebound in recent times, especially in the past week, with the yield trends of government bonds from Japan, the Eurozone, the United Kingdom, France, Germany, India, and other countries all showing a noticeable rebound.China's bond market may not have reached the time for a reversal yet, and it is still necessary to pay attention to the improvement of fundamentals.

Compared with overseas markets, China's bond market, although without transactions, has already formed a very large contrast in sentiment compared to before, especially under the continuous influence of the stock market's good news, the risk preference of market funds has been further enhanced, and the willingness of bond market funds to flow into the stock market has been strengthened.

Some views believe that China's policy efforts have increased risk preference in the short term, and some new expressions and positive statements have also effectively improved expectations, with both stock and bond markets significantly correcting the previous pessimistic expectations. Reporters have noticed that the fluctuations in the net value of the bond market and bank wealth management products have already shown that many investors have chosen to redeem.

According to calculations by the fixed income team of CITIC Construction Investment Securities, from September 27th to September 30th, the sample wealth management products' drawdown exceeded 0.1%, and the bond market yield rose by more than 20 basis points during the period, reaching the critical point of a small range of redemptions in history. At the same time, the stock market's rapid rise in late September in the short term has increased investors' risk preference, and the bond market faces a "siphon effect."

However, some analyses point out that the medium and long-term challenges faced by China's economy still require overall planning and systematic planning. It is too early to determine that the improvement of the economic fundamentals has reached the target, and the bond market is highly related to the economic fundamentals. Therefore, objectively viewing the current correction of the bond market helps to recognize the development pattern of the medium and long-term bond market.

Nuoyi Fund believes that in the medium and long term, the core lies in reshaping the new incentive mechanism of society under the conversion of new and old economic drivers, and in the short term, it lies in the macro supply and demand imbalance, insufficient demand, and weak prices. In the short term, it is necessary to pay attention to the policy continuity of the fiscal system after the monetary financial system "takes the lead," and the strength of fiscal policy is key, and there may be an expectation gap in the market.

At present, the trend of the bond market has not yet reversed. The current 10-year government bond at above 2.2% is already in a reasonable range, but there is a change in the wealth allocation ratio of the household sector under the enhancement of risk preference, and there is a probability of over-adjustment in the short term.