Since the policy shift on September 24, the once thriving bond market has experienced significant adjustments in a short period. Investors, especially those heavily engaged in the bond markets, have found themselves on edge amidst the turbulence caused by fluctuations in stock-bond activities, redemption waves, and the continuously evolving economic stability expectations. Yet, of late, the bond market seems to be gradually stabilizing, bowing to positive trends that have emerged as we inch closer to the end of the year. As November comes to a close, long-term interest rates have witnessed a notable dip of around 13 basis points, illustrating an upward fight where the underlying positive sentiments in the market overshadow the apparent negative indicators. By late November, many bond funds quietly regained some of their previous peaks. Early on December 2, the yield on the 10-year government bond even dipped below 2%, reaching a low not seen since April 2002, igniting hopes for a more favorable end-of-year market performance.So, will significant fluctuations occur in the bond market as the year concludes? As 2024 approaches its last month, how should one navigate the bond market effectively? Recent developments, including the outcomes of the U.S. elections, updates from the Federal Reserve, and pivotal domestic meetings and debt management strategies, have poised the bond market for a potential turnaround from the pressures of earlier months.In November, a pleasant surprise greeted the bond market. The yield of the 10-year government bond dipped towards 2.03%, grazing the lows seen on September 24. The market sentiment appears to be on the upswing, captured by the surge in bond futures — multiple categories striking historical highs upon opening earlier today.Several factors contribute to the retraction of government bond yields. Firstly, high-frequency data demonstrated a temporary improvement followed by a downturn, shedding light on the complex challenge of reviving the economy from its sluggish state, which necessitates combined efforts from multiple parties.Secondly, the fiscal plan unveiled in November, involving an additional limit of 6 trillion yuan, aligned well within expectations and maintained a prevailing focus on debt reduction. Furthermore, the impact of the Federal Reserve's decision to lower rates by 25 basis points in November has provided additional leeway for domestic monetary policy adjustments. Meanwhile, the results of the U.S. elections raised concerns about escalating trade tensions between China and the U.S., which could influence economic conditions in the year ahead.Since mid to late October, the fluctuation in market sentiment connected to the “stock-bond seesaw” has steadily decreased. Consequently, the bond market has returned to focusing on fundamental and policy analytical frameworks. Is a year-end market surge plausible? Looking back at bond market behaviors from 2019 to the present, there has been a recognizable trend of declining yields closer to December. For instance, in both 2019 and 2021, yields fell more than 5 basis points, and in other years like 2020 and 2023, they dropped over 10 basis points within a single month. In November, however, some upticks were noted in certain years, highlighting the irregular trends.By examining the yield changes around the first trading day of December, we observe a distinct "inverted V" pattern: the average variations in yields for 40 days out are -6.06 basis points initially and drop to -13.81 basis points after 40 days. This signifies an emerging behavioral pattern in bond trading that showcases the tendency towards changes as the year wraps up.The drivers behind these patterns, while varied, mainly stem from the decrease in policy uncertainties as the year-end approaches, and the anticipated adjustment in asset allocations by institutions readying for the new year amidst prevailing asset scarcity. As we assess the bond market's current condition against last year's end-of-year dynamics, we notice that the interplay between anticipated policy outcomes and the economic landscape mirrors prior scenarios, but with some critical differences marked by the heightened pressure surrounding government bond issuances. This year, the impending challenges in government bond issuance are more prominent, with a supply scale projected to be the largest in recent years, exceeding an average of 1.4 trillion yuan per month. Notably, there’s an increased focus on local government debt provision, raising alarms within the market. Despite the uncertainty, the outcomes concerning local government bonds have generally boded well. Following advances in arrangements for early positions by banks and coordination with subsequent rate cuts, supply risks appear manageable, ensuring market sentiment remains cautiously optimistic as the year draws to a close. Additionally, the principle of learning from market dynamics suggests institutions are preparing for potential bullish moves ahead of a notable year-end performance.In light of these developments, how can one seize the configuration opportunities as we approach year-end? The prior ebb and flow within bond trading reflected the tug-of-war between economic forecasts and newly introduced policies. Entering December, as supply pressures recede, the bonds are currently in an environment where immediate negative influences are waning. Once again, the prevailing perspective outlines a neutral-high view for bond trends. Even while the seasonal trends may appear unchanged, the underlying market conditions remain a solid source of opportunity for bond investors. The overarching trajectory suggests that our stance on low yields heading into 2024 holds firm.The bond funds in investors' portfolios continue to exhibit significant allocation value. In uncertain market conditions such as these, bond funds provide stability, mitigating risk within investment portfolios. Their capacity to quickly recover from drawdowns further enhances the robustness of total returns—which when paired with the warming bond market, can solidify overall gains.From a strategic positioning standpoint, the current prevailing market mood is favorable for bonds. Yet, maintaining a level of caution is prudent—staying neutral on duration and liquidity is advisable to buffer against potential shocks caused by any emerging information. In this environment marked by underlying volatility, capitalizing on price corrections appears to hold high relative worth, where selective reallocation followed by consistent market observation may render fruitful outcomes as the market evolves.
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