The Chinese bond market is experiencing its most challenging period in the last decade. Low interest rates and weak price movements are driving fund managers to alternative debt markets, while local bond traders face an environment where yield opportunities are virtually nonexistent.
The benchmark 10-year government bond yields have traded in a narrow range of 1.6%–1.9% this year; volatility is low, and there is no trend. The strategy of lowering interest rates, which has yielded significant gains in the past, is no longer working.
Therefore, while some funds are trying to profit from small price movements by trading more frequently, others are turning to alternatives such as convertible bonds and high-yield dim sum bonds in Hong Kong. This recession has led to nearly 300 bond funds posting paper losses since the beginning of the year. The China pure bond fund index is heading for its worst performance in 10 years, yielding only 0.74%. The fact that large players in the sector are attracting smaller clients with low fees and additional research support threatens the future of mid- and lower-tier funds. Fund managers are focusing on “fixed income plus” strategies to increase returns. However, many experts state that there are no more opportunities to squeeze in the domestic market and that market dynamics need to change for a lasting recovery.
