On May 17, a significant milestone was marked in the financial landscape with the issuance of China’s first ultra-long special government bondsWith a tenure of 30 years, this bond—labeled "24 Special Government Bond 01"—was met with considerable investor interest, as reflected in the weighted bid-winning interest rate at 2.57%. The bond issuance was characterized by a competitive market response, with an overall subscription rate of 3.9 times and a marginal subscription rate of 382.6. Notably, the yield on this newly issued bond was slightly below the prevailing valuation levels for similar bonds in China, as the yield for 30-year Treasury bonds stood at 2.58% on May 16.

According to an official announcement from the Ministry of Finance, this year will see a substantial issuance of ultra-long special bonds totaling 1 trillion yuanThe bonds will vary in their terms, with maturities of 20, 30, and even 50 years, and will offer semi-annual interest paymentsThis initiative reflects a strategic focus on several critical tasks such as accelerating technological self-reliance and advancement, promoting urban-rural integration, and facilitating coordinated regional developmentSuch a large-scale bond issuance brings into question its potential impact on the bond market, a topic of great interest among investors and economists alike.

Looking at short-term implications, Yue Shuai, the fund manager of the Norinco Tianxin one-year fixed open bond fund, pointed out that the risk in the second quarter may arise from the supply shock induced by these special bondsHe highlighted that the ongoing interaction between the bond market and the modalities of the bond issuance, along with the central bank's potential countermeasures, will shape future movements in this spaceHowever, on a long-term basis, despite a persistently low interest rate environment, demand for higher-yielding assets remains robust, making investments in long-term and ultra-long bonds particularly attractive for commercial banks seeking better value.

There are, of course, a multitude of factors that can affect the bond market

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From a macroeconomic perspective, the overall landscape seems likely to maintain a strong but fluctuating stateWhile the fundamental economic conditions and the monetary policy stance may still favor the bond market, the yield levels have notably diverged from those of significantly lower policy rates, suggesting a degree of immunity to potential downturnsAdditionally, elements such as macroeconomic fundamentals, shifts in monetary policy, risk appetite, and institutional behaviors collectively contribute to the complexity of predicting significant increases in yield.

Moreover, a glance at external factors reveals that as conditions evolve, the likelihood of compressed short-end spreads tipping downward may increaseOn one hand, the Federal Reserve’s ongoing attempts to adjust market expectations surrounding interest rate cuts will play a crucial roleOn the other hand, the projected stability of the U.S. dollar index, driven by comparisons of strength among leading global economies, is worth notingWhile China maintains its focus on a domestic-driven policy framework, it will likely continue to contend with outside pressures leading to stability in short-term policy rates represented by instruments like Open Market Operations (OMO) and Medium-term Lending Facility (MLF).

Looking ahead, Yue noted that positive factors in the economic arena are steadily accumulatingAs these elements build over time, the effects of policy will undergo a transformation from quantitative shifts to qualitative improvementsAs societal confidence rebounds and demand strengthens, the effect on credit may surpass expectations; consequently, the stance of monetary policy may also shiftThus, stakeholders must remain vigilant regarding fluctuations in policy intensity, the effectiveness of broader credit performances, and the central bank's responsiveness to monetary conditions.

When it comes to investment strategies, Yue emphasized that the bond market in 2024 will likely continue to operate within a relatively favorable macroeconomic environment

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Given the heightened awareness of potential risks, there will be a conscientious selection of portfolios that prioritize liquidityThe overarching strategy will follow a barbell approach, primarily investing in credit bonds with less than one year to maturity and bonds with a duration exceeding ten years, ensuring that the overall portfolio maintains a neutral market duration.

The fund managed by Yue Shuai—Norinco Tianxin one-year fixed open bond fund—is set to conclude its tenth closed period, transitioning into its tenth open period on May 27, 2024. Impressively, this fund achieved a net value growth rate of 6.06% for the A-class shares in 2023, while the corresponding benchmark performance registered only 2.15%. This positions it within the top 4% of its category (79 out of 1988), showcasing its competitive edge in the market. (Performance data credited to Norinco Fund, with the benchmark comparison based on post-tax interest rates from one-year term deposits plus 1.2%. The data has undergone a review process by the custodian bank, valid until December 31, 2023; rankings are derived from data published by Haitong Securities as of December 30, 2023, with data current to December 29, 2023, against a backdrop of actively managed bond funds.)

The structure of the Norinco Tianxin fund as a one-year fixed open bond fund allows it to maintain a stable product scale during its closed periods, effectively mitigating liquidity shocks stemming from daily transactionsThis stability enhances operational efficiencies and provides the fund manager with expanded opportunities to optimize performance in pursuit of greater returnsNotably, this fund avoids exposure to equities, warrants, or convertible bonds, thereby diminishing risk volatility relative to equity-type funds and boding well for its future performance.

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