Traders chase pips in China's stagnant bond market
A languid economy and no changes in monetary policy have ground China's multi-year debt market rally to a halt this year.
That shift has left traders with a market that has very little to offer in terms of arbitrage or returns amid intensifying competition - even as they scramble to deliver on elevated performance targets.
Benchmark 10-year government bond yields have spent this year in a 1.6% to 1.9% range, with no discernible trend and subdued volatility for most of the time.
"This year the tide's gone flat. No trend for allocators to follow and traders are stuck staring at still waters," said Huang Xuefeng, research director at Shanghai Anfang Private Fund, which has more than 3 billion yuan ($417.75 million) in assets under management.
The 10-year yield has risen just 10 basis points so far this year, with daily moves mostly confined to within 1-2 bps since April. That compares with a drop of 87 bps in 2024 and 28 bps in 2023, spurred by the post-pandemic scramble for safety in fixed-income products and leading to massive trading gains.
The lack of volatility has caught many investors off-guard. "Falling coupon rates and subdued volatility have made it hard for many to beat last year's performance," said Li Haitao, fund manager at Hexa Asset Management, which has 47 billion yuan in AUM.
Nearly 300 bond funds have witnessed paper losses this year, and an index tracking China's pure bond funds (.CSI930609), opens new tab achieved a return of just 0.74% so far this year, on track for the worst annual performance since the index's inception 10 years ago.
As intense competition forces top banks and funds to chase retail and smaller clients, market participants worry about an imminent crowding out that forces smaller funds to close.
"As top players offer lower fees and enhanced research support to attract smaller clients, questions are mounting over the survival prospects of mid- and lower-tier funds, particularly those ranked outside the top 50," said a Beijing-based mutual fund manager.
Bond mutual funds have faced persistent outflows since July, data from Tiantian Fund, a trading platform, showed, with RisingAMC HeFeng Pure Bond Fund and Hang Seng Qianhai Hengli Pure Bond Fund among those reporting substantial redemptions.
Neither RisingAMC nor Hang Seng Qianhai Fund Management could be reached for comment.
Despite persistent economic strains, traders are wary of betting on further yield declines — a strategy that paid off in prior years — as Beijing pushes to curb price wars and revive inflation.
This has prompted some traders to ramp up trading frequency to capture smaller price movements, while others are branching into new asset classes to broaden their skill sets.
"We've added trading volume as a new KPI this year, but it doesn't make too much sense — doing more trades doesn't necessarily mean making more money," said a bond trader at a regional bank in northern China, speaking on condition of anonymity as he is not authorised to speak to the media. His return target remains near 4%, similar to last year.
Fund managers are also turning to the so-called "fixed income plus" strategies, incorporating alternative assets to enhance yield. Industry data shows such funds expanded by 256.9 billion yuan to 1.49 trillion yuan by end-June, accounting for roughly 15% of mutual fund growth in the first half.
One of Hexa's bond funds managed by Li added convertible bonds in the second quarter, which account for 11.3% of net asset value, according to public disclosures.
Anfang's Huang said they had stretched duration for most of their products and added high-yield dim sum bonds traded in Hong Kong to enhance return.
"What can you do?" Huang said. "There's just nothing left to squeeze in the onshore market."
($1 = 7.1814 Chinese yuan)
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