Since August, interest rates led by medium and long-term bonds have experienced a "V" shaped rebound after hitting bottom, leading to a widespread sharp correction in bond funds.

Reflected in the public market, after nearly three trading days of significant declines from August 8th to August 12th, the average return rate of bond funds across the entire market has "zeroed out" all the growth since July.

Wind data shows that from July 1st to August 7th, there were nearly 6,000 bond funds with return data in the entire market, with an average return rate of 0.2916%. However, on August 8th, 9th, and 12th alone, the average daily return rate of bond funds across the entire market fell by 0.0674%, 0.069%, and 0.1565% respectively, with a total average decline of 0.2929% over the three days.

Since August 13th, market sentiment has shown signs of warming up again, and institutions have been observing the bond market trend more closely. In the view of public institutions, the central bank's warnings about the downward risks of long-term bond yields, strengthened regulation, and liquidity may become the main causes of this "roller coaster" market, but the bond market still has configuration value after the release of risks.

Medium and long-term bond corrections are the first to be affected.

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Overall, the sentiment of capital outflow in the bond market began around August 5th and continued to strengthen in the following week, with yields on interest rate bonds of all maturities almost universally rising.

The cooling of the bond market continued to intensify at the start of the new week. As of the close on August 12th, the 2-year government bond yield rose by 7.5 basis points to 1.63%, the 5-year government bond yield rose by 6.5 basis points to 1.92%, the 10-year government bond yield rose by 4 basis points to 2.24%, and the 30-year government bond yield rose by 4.5 basis points to 2.425%.

On the same day, the yields in the credit bond market also rose overall. China Bond data shows that the China Bond medium and short-term note yield curve (AAA) for the 3M term rose by 7 basis points to 1.95%, the 3-year term rose by 5 basis points to 2.08%, and the 5-year term rose by 8 basis points to 2.20%. The China Bond medium and short-term note yield curve (A) for the 1-year term rose by 6 basis points to 7.30%.

A series of interest rate adjustments have led to an oversold bond price, and in the public fund market, different bond funds' return rates have also diverged according to the length of the issuance term of the target debt instruments.

In addition to convertible bond funds and secondary bond funds, which have a high correlation with the equity market and strong volatility, medium and long-term bond funds are the first to be affected. Statistics show that on August 12th, the average decline of medium and long-term pure bond funds in the market was 0.1553%, while the decline on August 12th for passive index funds of national development bonds and financial bonds with a term of more than 5 years was almost all above 0.4%. In comparison, short-term pure bond funds were more resilient, with an average daily decline of 0.06%.The only two 30-year government bond ETFs in the market both saw a decline of over 1% on August 12th. Among them, the Bosera Shanghai Stock Exchange 30-Year Government Bond ETF recorded a daily return of -1.18%, which not only set the highest decline in the bond fund market for that day but also broke the record for the largest single-day decline since the fund was established on March 20th of this year.

Under significant market fluctuations, investors began to concentrate on profit-taking and withdrawal, which also led some bond funds to adopt net value adjustment strategies. On August 13th, Guangfa Fund announced that the Guangfa Jingyuan Pure Bond D shares experienced a large redemption on August 12th. To ensure that the interests of fund holders are not adversely affected by the precision of the net value to the decimal point, the company decided to increase the fund's net value precision to eight decimal places. According to the 2023 annual report, Guangfa Jingyuan Pure Bond D is essentially an institutionally customized product, with institutional investors accounting for 99.89%, and the number of holders is only two.

Coincidentally, since August 9th, Zheshang Securities Asset Management also announced that it would increase the net value precision of Zheshang Huijin China Bond 0-3 Year Policy Financial Bonds to six decimal places. On August 8th, Yongying Fund decided to retain the net value of Yongying Zhaoli Bond C class fund shares to eight decimal places.

According to incomplete statistics from fund announcements, over the past month, more than 20 bond funds have also increased their net value precision due to large redemptions.

However, at present, market sentiment is also beginning to show signs of recovery. For example, Wind data shows that in recent days, the number of daily transactions for 10-year and 30-year government bonds in the entire market has been declining, reflecting a moderation in the intense tug-of-war between bulls and bears. There are also recent market rumors that, due to the current market sensitivity or spontaneous reasons, several banks and some securities firms have temporarily stopped market-making for long-term bonds.

On August 13th, government bond futures once again closed higher across the board. The 30-year main contract increased by 0.62%, the 10-year main contract increased by 0.2%, the 5-year main contract increased by 0.22%, and the 2-year main contract increased by 0.04%. In terms of spot bonds, the yield on long-term government bonds has slightly declined. In the view of many industry insiders, bond prices have adjusted to an attractive level, and after the cooling of the phased selling behavior, institutions will still choose the right time to trade.

There is no fundamental basis for the bond market to bear.

Overall, the central bank's proposal within the month to further improve the market-oriented interest rate control mechanism is generally considered the catalyst for the current bond market sentiment. In fact, since April of this year, the central bank has warned to pay attention to long-term government bond yields, emphasizing the prevention of excessively low interest rates leading to intensified involutionary competition and capital idling.

On August 9th, the central bank further released the "2024 Second Quarter China Monetary Policy Implementation Report," pointing out that in late June 2024, the 10-year government bond yield approached the 2.2% threshold, reaching a 20-year low and significantly deviating from the reasonable central level. This dynamic is also seen by the market as a signal that the central bank will regulate long-term interest rates.In the past week, the Interbank Market Dealers Association has successively investigated violations of national debt transactions. In addition, in the public market, there have been continuous reports such as "regulatory suspension of some debt index fund issuance" and "newly approved debt funds are required to sign a commitment letter to strictly control duration," which have all had a certain impact on the market's bullish sentiment.

"This round of bond market adjustment is the result of a combination of various factors such as regulatory measures, emotional fluctuations, institutional behavior, and even market rumors," Great Wall Fund pointed out.

However, Great Wall Fund also stated that, on the whole, although there are more disturbing factors, the current logic of the bond market may not have changed. From the perspective of fundamentals, the weak reality has not changed for the time being; from the perspective of the capital market, the short-term market may be disturbed due to factors such as payment and tax periods, but it is difficult for short-term capital to tighten before the economy truly improves.

The Huatai Fixed Income Team also believes that the original intention of the central bank's release of the monetary policy execution report this time may not be to significantly raise the interest rate level, but more to avoid forming a one-sided expectation and continuously strengthen it. The improvement of the fundamental expectation is the root. The fundamental responsibility of monetary policy is to control economic growth and price stability. At present, the fundamentals are still in a wave-like operation process, which does not support the central bank's contractionary policies. Subsequently, it is more necessary to pay attention to the fundamentals and fiscal trends. If the central bank operates in line with the trend and leverages its strength at that time, the policy effect will be more obvious.

Huatai Fixed Income stated that looking forward to the future market, as the market adjusts, long-term interest rates and a batch of bond valuations are also expected to gradually adjust to the right position, but the overall risk-return characteristics of the bond market remain controllable, and it is difficult to continue to bear or fall into another "debt disaster."

Penghua Fund pointed out that at present, the long-term interest rate is at a historically low level, and the bond market is expected to be mainly volatile. However, the central bank's series of interest rate cuts and open market operations in July indicate that monetary policy is still relatively loose, and liquidity is likely to be in a reasonable and sufficient state. Considering that the trend of domestic demand repair still requires patience, and under the background of stable financing demand at the bottom, the domestic liquidity remains stable and slightly loose, and the bond market risk is overall controllable.

Industrial Bank Credit Suisse Fund stated that at present, the market's expectations for the fundamentals and policy faces are relatively consistent, duration trading is crowded, and the leverage ratio has also increased, and the instability of the trading structure continues to accumulate. At the same time, the regulatory authorities have a strong control over both the short-term and long-term interest rates through means such as narrowing the interest rate corridor and window guidance. Unless the policy interest rate is significantly reduced, the space for further downward movement of the yield curve may be relatively limited.

Industrial Bank Credit Suisse Fund believes that on the other hand, the current trend of weak real entity financing demand has not been reversed. Considering that institutions have been under-allocated in the past, the pattern of asset scarcity continues, and the regulatory authorities also need to prevent risks caused by risk disposal. Therefore, the amplitude of market adjustments may also be relatively controllable. Before other policy signals appear, our duration view will be more inclined to a neutral response.

Specifically, for the allocation of bond funds, many public institutions have stated that medium and short-term bonds have short duration and are mostly stable, belonging to varieties that can cope with short-term adjustments in the bond market. Historically, the yield of the medium and long-term pure bond fund index is generally higher than that of the short-term pure bond fund index in most years, with risks and returns coexisting.