Fixed-Income Monthly Market Snapshot - Dec 2023
December 07, 2023|

Lingyun Ji

In Q3, the economy showed a stabilizing trend, although the impetus for substantial rise remains weak. It is highly probable that the annual economic growth target will be achieved, and strong policy stimulus will unlikely to happen in the last two months of the year. Overall, the influence of economic data on bond market volatility is expected to diminish from the present moment until March of the following year. The main concern in the bond market lies in the tight liquidity. This risk is unlikely to be completely resolved before the end of the year and may continue to disrupt short- to medium-term yield levels. However, over time, this risk is expected to gradually ease after the New Year and the Spring Festival, and bond market yields are expected to decline again. Consequently, the current juncture is deemed opportune for bond asset allocation. For portfolios with stable liabilities, we will actively adjust the allocation in line with the upward movement of yields, and wait for opportunities to harvest capital gains after the New Year.

Ying Liang

In Q4, with the concentrated issuance of government bonds, year-end liquidity assessment of commercial banks and high level of reverse repurchase agreement outstanding amount, the market expects an unstable liquidity, driving up interbank deposit rates. Looking ahead, from a policy perspective, the current stable monetary policy stance remains unchanged. Given the backdrop of an uncertain recovery in the underlying economic fundamentals, the upward movement of money market yields lacks fundamental support. If the liquidity continues to be tight, it will gradually impact the pricing of short-term credit bonds and other assets. Therefore, the high level of money market yields is considered a short-term phenomenon. As time goes on, the impact banking system's year-end assessment on the money market will weaken. Additionally, the liability factors in money market products such as money market funds and cash management products will gradually become stable, so we can expect a decline in yield of money market assets once the expectation becomes clearer. Furthermore, from a yield perspective, the interest rates in money market assets are higher than the MLF rate, indicating favorable opportunities for allocation. Thus, with the progression of asset allocation, the yield of money market funds is expected to rise, while the NAV of short-term bond funds will continue to remain stable.

Wanshu Liu

Since the third quarter, fiscal policies have been consistently strengthened, with an accelerated issuance of government bonds. The money market shows high volatility and the funding rate witnessed an upward trend. Affected by these factors, short- to medium-term assets have rapidly increased by 30-50 basis points from the lowest point of the year after the interest rate cut in August. Currently, the relative policy rate spread is at a historical high, while the term spread of medium- to long-term instruments is at a historical low, indicating a high potential for allocation. In December, there is considerable uncertainty in the money market due to year-end factors: the issuance pressure of primary market CDs has not been alleviated and the risk factors in the bond market have not been resolved. However, the accommodative monetary policy has not changed, as emphasized in the Q3 monetary policy report, which highlights "maintaining the prudence of monetary policy" and "paying more attention to cross-cycle and countercyclical adjustments". In addition, the central bank's open market operations and the call for "continuously reducing financing costs" by the recent financial work conference also reflect that the short- to medium-term assets has limited room for significant adjustment. It is important to pay attention to the allocation opportunities of short- to medium-term assets in the year-end volatile market conditions.