In the context of the continuous decline of A-shares and the endless decline of many equity assets, bonds** have become the choice of more people. Why do bonds show anti-volatility characteristics in the market, what are the factors that affect the volatility of bonds, and where will bonds go in 2024.
With these questions in mind, we conducted an in-depth interview with Zhang Luozhao, the current manager of the fixed income department of ICBC Credit Suisse.
* In the market, the yield stability of bonds.
Moderator: Why is it that at such a point in time, the debt base has become the object of everyone's pursuit?
Zhang Luozhao: I think there are three reasons: the first reason is that in the past few years, the overall holding experience brought to investors by bonds has been very good. On the one hand, the returns are not too low, and on the other hand, the volatility is relatively small. Of course, it experienced a relatively large fluctuation in the fourth quarter of 2022, but soon the net value was restored in the first quarter of 2023.
The second reason is that (in recent years) high-volatility, relatively risky risk assets have not performed well, and for many investors, returns have fallen short of expectations. In this case, investors may choose to do some asset rebalancing operations, from risky assets to safe-haven and stable assets represented by bonds**, which is also reasonable.
The third reason, which I personally think is also the most direct reason, is that the rate of return on capital of the whole society is declining, and some other financial products with similar risk-return characteristics of bonds, such as deposits, certificates of deposit, and insurance, should also have declining long-term expected returns. For example, the five-year deposit rate of large state-owned banks also underwent several rounds of cuts last year, and by the end of the year, it had reached the level of 2%. Some long-term increased life insurance, which is also relatively popular among investors, has a scheduled interest rate of 3 in the second half of last year5% to 30%。There are also many banks that are lowering the interest rates on their deposits and certificates of deposit.
Therefore, as a low-risk and stable return financial product, the allocation value and investment value of bonds** may be highlighted. This may also be the most direct reason why bonds** are sought after by the market at this point in time.
Moderator: Why is it that the overall returns of other products are not very good in the process of lowering interest rates, but bonds have highlighted their advantages.
Zhang Liuzhao: Structurally speaking, bonds are actually invested in the principal, and there may be interest payments in the middle, repayment of principal at maturity, and of course, there will be a one-time interest payment in the end. In this process, the interest is fixed and the coupon rate is fixed. Once the overall market return declines, and bond investors have locked in a relatively high rate of return, the value of the bond will be reflected at this time.
For example, a bond with a rate of return of 4%, not counting the intermediate interest payment, assuming that there is one year left to mature, 100 yuan to buy, the coupon rate is 4%, and you can get 104 yuan after one year, which is the simplest model. If the average return of the whole society is now %, an asset with a return of 4% in a year is actually not very attractive. But if all of a sudden this social rate of return drops from 5% to below 4%, for example, to %, the asset that has locked in the 4% return in the early stage will be very attractive, and everyone will chase it, which will lead to the ** may be ** of bonds.
Factors influencing bond volatility.
Moderator: In recent years, we have found that there seems to be a certain degree of volatility in bond yields. Can you give us an analysis, what are the factors that affect the volatility of bonds**?
Zhang Luozhao: A very simple and easy-to-remember conclusion is that the yield to maturity of bonds is roughly inversely proportional. In response to this problem, I think one of the most important factors is the relationship between the supply and demand of funds in the real economy, because as a financial asset, the return of bonds essentially comes from the cash flow created by the real economy and the borrowing demand of the real economy. If we talk about the relationship between the supply and demand of funds in the real economy, assuming that the supply exceeds the demand and the funds are very scarce, everyone will want to do bond financing. In this case, the yield to maturity or the interest rate of the bond will rise, causing the bond to fall, and eventually the net value of the bond will be **, which is the first and most important reason.
The second reason is that in addition to the real economy, there is also a market called the interbank market, which is actually the main place for institutional investors in bonds to do bond trading and repurchase financing. In this market, there is also a balance between the supply and demand of funds. If in this market, funds are also in short supply, for institutions, the cost of financing is rising, which is equivalent to the cost of holding bonds is rising, and institutions will have an incentive to sell bonds, which will bring pressure to bonds.
The above two factors are the more important and fundamental factors that I think.
In addition to risk-free and low-risk bonds such as treasury bonds and policy financial bonds, there are also bonds that are believed to be used, and credit bonds issued by enterprises will naturally have a certain credit risk. For banks, there will also be bad debts when lending loans, and for credit bonds, there will be credit risks such as default or extension. Once the bond has credit risk, the bond will also have a credit risk.
Criteria for selecting investment targets.
Moderator: When selecting the underlying target of bond assets, what are the indicators to be considered?
Zhang Luozhao: I think the most important thing is to know the customer, that is, the ** product I manage, what kind of risk appetite the customer is, whether there are more institutions or more individuals, what is the maximum drawdown that can be accepted, and what is the approximate level of the income target. The risk must first be taken by ** to match the customer's perception.
The risks that need to be dealt with and managed by bonds** are mainly in these categories: the first is duration risk, the second is credit risk, and the third is liquidity risk. Generally speaking, the longer the bond term, the longer the duration, the greater the volatility, because the portfolio duration of the bond is actually derived from the sum of the duration of the underlying assets, and if the underlying assets have a long duration, it will lead to a very long duration of the bond, and the volatility will be correspondingly greater.
Moderator: Because the implication here is a change in interest rates.
Zhang Luozhao: Yes. Because the bond is the interest rate fluctuation multiplied by the duration, it can be roughly understood that if we are given that the range of interest rate fluctuations is the same, the longer the duration, the greater the volatility, and the control of duration risk or the management of duration risk will require that when the bond is issued, it must pay attention to the underlying period, whether it matches the risk characteristics of the product, which is the first point.
The second point is credit risk. Managing credit risk is actually not being able to buy all low-rated bonds, and in case of default, the damage to the customer's net worth will be more serious. If you buy all high-rated, even risk-free bonds, the return to the client will be lower, and the manager may need to balance the middle.
The most important thing is to look at the rating, the meaning of the rating is very broad, not only the external rating, the rating company that we often see to credit bonds, such as AAA, AA+, AAA, etc., we also have to combine the company's internal research conclusions for investment, because each company will have its own set of risk assessment system for credit bonds.
The third is liquidity risk, liquidity risk actually I think is a more obvious difference between bond investment and investment, because investment is relatively liquidity is not a problem that everyone attaches too much importance to. However, most of the liquidity of bond assets may not be as good as **, once as I just said, the management of an open-ended bond ** will face concentrated large-scale redemption, and may face the asset side can not be realized, can not meet the customer's redemption demands in a timely manner, this is the liquidity risk. If the customer's liquidity demand is not very strong and the holding period is very long, we can allocate more low-liquidity assets on the investment side, because the lower the liquidity of the asset, the higher the potential return provided, but at the cost of not so good liquidity.
The key to maintaining the core competitiveness of products: robustness.
Moderator: For short-term, short-to-medium term, and medium- and long-term pure debt**. What is the basic logic of the configuration?
Zhang Luozhao: It may be mainly reflected in the maturity, in response to what I just said, duration or maturity is a very important indicator to measure the interest rate risk and volatility of bonds. In order to give the customer a clearer idea of the potential volatility he may face, there will be a time frame in the product design. For example, short-term bonds** will limit the style of assets within 397 days, and there is a minimum proportion requirement; Short- and medium-term bonds**, for assets within three years, there is a minimum proportion requirement; Medium and long-term pure debt** has no special requirements at the maturity level.
Finally, because of the constraints of short-term bonds, the maturity and weighting of the allocated bonds will not be too long, the short-term bonds** may be medium, and the maturity of medium- and long-term pure bonds** may be slightly longer, resulting in the daily volatility of these three types of products, of course, there may be some differences in returns.
Moderator: It seems that the performance of short-term debt** has been relatively bright recently, why is that?
Zhang Liuzhao: Short-term bonds are the most closely related to liquidity, and the interest rate on short-term bonds was relatively high in the fourth quarter of last year. At the end of the quarter, the issuance of ** bonds tends to end, and by the beginning of this year, there are some seasonal factors, the liquidity of the entire interbank market has turned loose, and short-term bonds are sought after by everyone, and the interest rate of short-term bonds has fallen relatively quickly, which is the first point.
The second point is that there is an expectation of an interest rate cut in January, and the market has certain expectations for the central bank to reduce the LPR and MLF interest rates. If you want to trade the expectation of interest rate cuts, a more direct investment method is to go to short-term bonds, so these two factors have jointly contributed to the performance of short-term debt assets or short-term bonds in the past month or so.
Moderator: Since January, the yield of 10-year treasury bonds has fallen, hitting a new low in three years, what kind of impact will this have on pure bonds?
Zhang Liuzhao: The impact of the decline in bond interest rates on bonds is divided into current and forward. The current impact is more on the stock, and the decline in bond yields will make the bond *** For investors who have already held bonds, the net value will rise directly, which must be a good one, which can improve his current return.
However, the decline in bond yields in the whole market will increase the risk of reallocation of bond investment, and if you want to buy a new bond, you will not be able to buy bonds with such high interest rates as before, which will actually reduce the potential long-term return of bonds.
Specific to the recent decline in the interest rate of 10-year treasury bonds, I personally think it may be more a reflection of everyone's expectation that in January, whether the central bank will have a monetary policy easing game, or a preemptive transaction. In the event that this expectation is not met, or after the expectation is fulfilled, the market will also have some bond yields due to other factors**. In that case, I think it might lead to a better configuration opportunity.
Moderator: As a bond manager, what do you think is the key to maintaining the core competitiveness of the product?
Zhang Luozhao: The first is "steady", in the case of striving to be steady, we can strive to create higher and better medium and long-term returns for customers in the medium and long term.