Bond Market Stall: Redemption Wave?
The bond market has experienced a significant downturn recently, leading to increased concerns among investors regarding negative feedback loops in wealth management products. This shift has prompted various stakeholders to assess the underlying factors contributing to the market's trajectory.
Recent statistics from market analysts reveal that the bond market's considerable adjustments in the previous week have caused a marked decline in the yield of wealth management products, dropping nearly 200 basis points (BP) week-on-week. Notably, those products backed by bond assets have shown the steepest decreases in yield, making it a focal point for investors seeking stability in their portfolios.
Industry experts attribute the recent deep adjustments within the bond market primarily to intervening policy factors. As many non-banking institutions have offloaded their holdings, other players, including insurance funds, have opted to buy into the market, suggesting that the probability of a widespread redemption frenzy remains relatively low. The fear of a complete redevelopment of the wealth management sector appears to be unfounded, at least for the moment.
The volatility in wealth product yields amidst a correction in the bond market is striking. One individual investor lamented, “Low-volatility investments suddenly feel like stocks; I can lose thousands in a single day.” This sentiment encapsulates the frustration many investors are feeling as they observe the substantial declines in the revenue generated by fixed-income products and bond funds, with yields altering dramatically from weeks prior.
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Since August, the bond market has been undergoing further adjustments. Under pressure, both the volume of bank wealth management products and their associated yields have altered, with numerous bond funds experiencing significant redemptions. This change has ignited investor anxiety about the possibility of a renewed redemption wave.
Last week (August 5-11), the bond market encountered a radical adjustment. According to data from Wind, government bonds with maturities of seven and ten years saw the highest yield increases, each rising approximately 7 BP to reach 2.0700% and 2.1986%, respectively. Furthermore, the yield for thirty-year government bonds also climbed 4 BP to 2.3950%. Notably, at the beginning of last week, yields for the ten-year and thirty-year bonds had fallen to historical lows not seen since 2003 and 2005, respectively.
The significant downturn in the bond market has contributed to fluctuations in the net values of several wealth management products. Estimates from multiple market institutions indicate that the average annualized yield for these products dropped to about 2.4% last week, reflecting a decrease of approximately 194 BP from the previous week. Among different types of products, fixed-income and income-plus categories experienced the most pronounced adjustments, with their yields falling respectively to 3.05% and 3.45%.
Overall, the performance of funds also exhibited a noticeable decline. Average losses observed in medium to long-term pure bond funds last week hit 0.088%, with 854 funds suffering declines of over 0.1%. Meanwhile, short-term pure bond funds recorded smaller losses but still fell into negative territory, averaging a 0.02% decline. Of the twenty bond exchange-traded funds (ETFs) across the market, 17 reported losses.
Despite the tumultuous market conditions, the scale of the wealth management market has not only remained stable but has actually expanded. As of August 11, market institutions reported a total of 29.77 trillion yuan in wealth management products, which marks a slight increase of 22 billion yuan compared to the previous week. When broken down, fixed-income types reached 21.19 trillion yuan, showing an increase of 389 billion yuan; cash management products saw a decrease of 234 billion yuan at 7.84 trillion yuan; while mixed-type products dropped by 128 billion yuan to 0.59 trillion yuan.
Amidst this context, non-banking institutions have become the primary sellers in the market. Observers suggest that the short-term bearish sentiment in the bond market may primarily stem from stop-loss situations among major players such as fund companies, banks, and securities firms’ asset management units, noting that major banks have not shown significant signs of selling. Additionally, there are indications that some rural commercial banks have also engaged in selling activities.
A source from the bond industry indicated that the recent adjustments in the bond market can be viewed as a chain reaction prompted by regulatory guidance. The predominant selling pressure appears to stem from non-banking entities, with fund companies at the forefront and some separate situations of bank wealth management products being redeemed.
Furthermore, it has been suggested that wealth products could be redeemed in public fund offerings, creating an illusion of selling by fund companies, while, in reality, the redemption of funds remains the primary catalyst for these movements. Throughout this year, diminishing deposit rates and evolving regulatory policies—such as halting manual interest subsidies—have exacerbated the underlying issues of asset mismatches within the growing wealth management market. This has led to a noticeable uptick in investment into public funds, with the proportion of wealth management products directed towards them increasing from 2.1% at the end of 2022 to 2.5% as of the first quarter's end.
The trigger for the non-banking institutions' sell-offs last week was a self-regulatory investigation initiated by the interbank trade association against several rural commercial banks, accused of potential price manipulation and benefit transfer in the secondary market for treasury bonds. Consequently, the expectation of tighter regulatory scrutiny has prompted an increase in caution, resulting in several wealth management companies reducing their long-bond positions rapidly.
This looming sense of anxiety has permeated asset management circles. Certain brokerage firms have already begun to halt specific transactions of treasury bonds, and some have even paused bridging operations—an activity in which they merely act as intermediaries for two products to complete bond transactions. In this intricate web of responses to regulatory pressures, rural commercial banks, especially four specifically identified banks, have opted to cut their medium-to-long-term treasury bond holdings in an effort to mitigate risks associated with scrutiny.
As a countermeasure, many institutional buyers are seizing opportunities to increase their positions amidst the swift corrections observed in the bond market. This activity has primarily been driven by insurance and trust funds that have recently capitalized on rising bond yields. Reports indicate a trend of adding positions in 20-year and 30-year government bonds among several Shanghai-based insurance investment units.
Despite the challenges facing the bond market, experts gauge that the likelihood of a negative feedback risk occurring remains relatively low. Although the bond market's corrections have prompted fluctuations in the net values of wealth management products, the concentrated sell-offs from non-banking institutions and the subsequent market downturn do evoke memories of the redemption waves witnessed in late 2022 and March 2023. However, the current conditions do not suggest a resurgence of such negative feedback loops.
Market diagnostics reflect that a rising ratio of products showing negative net values is not yet present, indicating limited potential for a new wave of redemptions. Furthermore, the bond market's corrections have not led to significant widening of credit spreads. Additionally, many investors seem to have grown tolerant of short-term volatility, as alternative investment options appear limited given the current market risks.
Recent data from Wind reveals that the net value-breaking rate for wealth management products stood at 2.07% as of last weekend, showing a minor decrease from the previous month’s 2.08% rate. An analyst from Zhongtai Securities emphasized that while the yield for wealth management products has plummeted significantly week-on-week, the absolute figures remain within normal parameters compared to previous redemption waves, and a robust safety cushion remains from the bond market's favorable performance earlier this year.
Regarding bond investments, observers believe that the increase in wealth product scales, under pressure from an "asset shortage," offers some degree of support for the bond market. Chief economist Mingming at CITIC Securities posits that the current corrections may prompt wealth products to dynamically adjust their duration sensitivity, favoring shorter-term holdings, thereby enhancing defensive capabilities, which could fortify the shorter end of the bond curve, possibly aligning with central bank regulatory objectives.
However, investors are advised to remain vigilant about recent bond market fluctuations. Should interest rates persistently rise and capitalization tighten, the potential for pressure from redemptions and asset sell-offs could intensify. As investors assess the fluidity of the market, the critical question remains: At what point would rising rates begin to put pressure on wealth management products, invoking fears of another redemption wave?
Despite lingering thoughts regarding redemption pressures, analysts caution that should rates rise significantly above average holding costs for bonds, substantial redemption pressure could materialize. Furthermore, certain reports theorize that the tipping point where redemption risks would emerge could lie at various additional technical thresholds against different maturities of government bonds.
General consensus indicates that the adjustment in the bond market is not yet finished, but a diminishing trend in volatility is anticipated. Macro analysts at Minsheng Securities forecast that fluctuations in the bond market are set to gradually decline. Since the central bank's first mention of monitoring mid-to-long-term yield movements in early April, the ten-year national bond yield has maintained a relatively stable trading range around the 2.3% mark. As market participants grow proficient in this evolving landscape, volatility is expected to gradually narrow towards more manageable levels.