Bond market volatility continues, institutions recommend mid-short end carry trade strategies, long end wave trading with quick entry and exit

Last week, the bond market continued to be affected by rising inflation expectations. Short-term bonds remained stable, while long-term bonds experienced volatility. As a result, some medium- and long-term pure bond funds saw significant weekly declines, with some dropping over 1.7%. Notably, industry news about the implementation of relevant policies is expected to direct funds toward short-term liquidity assets. Therefore, under other factors, the investment value of long-term bonds will still be tested in the future.

Bond Market Shows Divergence Between Short and Long Ends, Some Funds Drop Over 1.7% Weekly

From March 9 to March 15, the bond market experienced sharp fluctuations, with the long end underperforming the short end, and the yield curve steepening. Particularly on Monday, international oil prices surged, combined with the central bank’s recent net liquidity withdrawal, leading to weak market sentiment and panic selling, especially in long-term bonds.

Overall, short-term products benefited from loose liquidity and self-discipline management of interbank deposits, causing yields to slightly decline. Meanwhile, long-term and ultra-long-term products adjusted due to unexpectedly high inflation data and concerns over inflation expectations stemming from Middle Eastern tensions, with ultra-long-term bonds experiencing larger adjustments.

Data from Founder Securities shows that last week, the 10-year government bond yield rose by 3.25 basis points to 1.8225%, and the 30-year government bond yield increased by 6 basis points to 2.2925%, reflecting a “weak long end, stable short end” pattern.

In terms of funds, Jin Yuan Shun An Hong Ze experienced a significant decline, with a net value drop of 1.76%, making it the pure bond fund with the largest weekly performance decline. It is a medium- to long-term pure bond fund. Among top-performing products, Xin Yuan Jing Feng had the best return, with a weekly return of 0.50% for Class A shares.

Overall, the weekly growth rate of pure bond funds slowed, with the average performance of medium- and long-term pure bond funds turning negative. This is also related to current long-term bond yields. According to Guomao Futures, the 10-year government bond yield is expected to fluctuate between 1.75% and 1.85%, with little chance of a trend-breaking move. The 30-year contract, affected by supply and risk appetite, remains in a weak oscillation. If economic data unexpectedly improves or equity markets strengthen, long-term interest rates may still face upward pressure.

NuoAn Fund’s analysis indicates that for domestic bonds, the divergence between the short and long ends may continue: the more certain strategy is leveraging short- to medium-term credit bonds, as short-term liquidity and allocation support will persist. For the long and ultra-long ends, internal constraints from monetary policy pace and space, as well as external influences from risk aversion and inflation expectations, will continue to impact.

Bond ETF Market Shrinks Amid Weak Volatility

Last week (March 9-15), the bond market was weak and volatile, with bond ETF market size contracting. Several ETFs experienced nearly 10 billion yuan in net outflows during the week.

Specifically, net outflows from rate bond ETFs, credit bond ETFs, and convertible bond ETFs were 3.276 billion yuan, 4.829 billion yuan, and 1.699 billion yuan, respectively, totaling 9.804 billion yuan in net outflows from bond ETFs. Additionally, February’s CPI and foreign trade data both exceeded expectations, coupled with geopolitical tensions causing sharp oil price fluctuations. Under inflation concerns, the bond market remained weak, with ETF net asset values generally declining, increased redemptions, and overall size shrinking again.

Looking ahead, the combination of strengthened interbank deposit self-discipline and quarter-end disturbances suggests short-term assets will continue to outperform. If interbank deposit rates are lowered, non-bank institutions may accelerate “deposit substitution,” boosting short-term funding ETFs and similar short-duration products.

For long-term products, the macroeconomic fundamentals still show a “weak recovery” trend. Broad monetary policy expectations may weaken temporarily, and with government bond issuance gradually increasing, short-term yields on long-term bond ETFs may find it difficult to decline significantly. Additionally, at quarter-end, marginal tightening pressures on funds, rising risk aversion, and profit-taking sentiment could lead to redemptions, especially in bond ETFs with weaker recent performance and liquidity.

In summary, institutions advise caution in extending duration, while emphasizing the importance of credit bond ETFs with stable coupons and liquidity advantages. NuoAn Fund’s analysis notes that because inflation transmission is lengthy, the actual effects need ongoing observation. The initial phase often involves emotional shocks. Therefore, if long-term bonds experience rapid and excessive adjustments in the short term, traders can consider tactical opportunities, with quick entry and exit, while controlling positions.