Shenwan Hongyuan Spring 2026 Credit Bond Market Outlook | From Reducing Duration to Managing Duration, From Defense to Offense

(Source: Shenwan Hongyuan Rongcheng)

Huang Weiping, Yang Xuefang, Zhang Jinyuan, Cao Xuan

Summary

• The core contradiction shifts + asset allocation remains balanced, signaling a transition period for bonds to “sell on every rise,” with a steepening yield curve

• Pay attention to potential impacts of supply and demand changes on the credit bond market: Q2 focus on potential incremental demand for credit bonds

• Since the beginning of the year, weak credit bond supply and strong demand have driven impressive market performance

• Seasonal patterns from March to May typically show the following characteristics:

  1. March: supply is not weak but demand weakens — historically, March supply is stable, but due to Two Sessions disruptions and end-of-quarter fund redemptions, potential incremental demand may decline

  2. April: increased supply and strong demand — before annual reports, April often sees higher supply; post-quarter, wealth management scales recover quickly, boosting credit bond demand

  3. May: reduced supply but still strong demand — after annual report updates, supply drops significantly; meanwhile, broad funds like wealth management and public funds continue to allocate heavily to credit bonds

• This year, from March to May, overall supply and demand may continue historical patterns, but structural changes are more evident:

  • Supply side (ordinary bonds): since the start of the year, net inflows into urban investment bonds, with continued strong industrial supply, generally following seasonal trends

  • Supply side (financial bonds): no new issuance of perpetual bonds, increased issuance of broker-dealer ordinary bonds; such extreme structural features are unlikely to persist

  • Demand side (wealth management): stable scale in Q1, with residual seasonal redemption pressure in March; significant seasonal growth in Q2, forming the baseline for credit bond demand, mainly in the short to medium term

  • Demand side (funds): restructuring of amortized bond fund scales; focus on potential incremental flows into fixed income + funds; credit bond ETFs may still see inflows at quarter-end

  • Demand side (insurance): increased proportion of dividend insurance liabilities, decline in traditional insurance; reduced demand for long-term bonds, increased need for flexible income; secondary bond funds are gradually becoming important tools for insurance allocations; direct investments also contribute significantly, but as the “opening red” effect fades and valuations decline, buying momentum weakens

  • Other potential changes in demand: since early this year, credit spreads for bonds over 10Y have narrowed, but demand remains mainly from insurance, social security, and pension allocations; liquidity and institutional behavior data show cautious attitudes toward ultra-long credit bonds

  • Additional potential change: interbank rules optimization promotes the launch of sci-tech innovation bond indices and index-linked products; watch for opportunities in interbank sci-tech bonds

• Valuation and relative pricing suggest current credit bonds may still be less attractive, but potential adjustment pressures are manageable: credit follows adjustments rather than overshoot

• Since the start of the year, credit bond yields and spreads have generally declined; recent spread recoveries notwithstanding, valuations remain relatively low historically, indicating limited attractiveness

• Seasonal patterns for spreads from March to May typically show:

  1. March rebound: historically, spreads tend to rise as supply remains stable but demand weakens

  2. End of March and early April peak and decline: supply is strong, demand improves, especially after wealth management redemptions ease, spreads tend to peak and then fall

  3. April-May oscillation downward: supply weakens, demand remains strong, broad fund liabilities grow, helping spreads oscillate lower

• In a market environment with mildly weak long-term rates and stable liquidity, the curve steepens; overall, short to medium-term credit bonds retain advantages as coupon assets. As Q2 approaches, seasonal demand for credit bonds often strengthens, and the current wide spreads are relatively manageable

• Outlook for March to May: spreads may oscillate mildly in March, with potential opportunities in April and May

Strategy Outlook: shift from reducing duration to controlling duration (steepening yield curve), from defensive to proactive (credit with structural features, following adjustments rather than overshoot, potential incremental demand in Q2)

• Under a steepening yield curve, credit bonds should reduce duration, but given their structural features, incremental demand may emerge in Q2. Future risks lie in following adjustments rather than overshooting. Therefore, before and after seasonal transitions, investment should shift from defensive to proactive, actively seeking potential opportunities in April and May, while maintaining discipline on duration

• Recommend gradually shifting from medium duration (3-5 years) to short-medium duration (around 3 years) in March, moving from high-elasticity, low-margin products (long-term perpetual bonds) to low-elasticity, safer assets (short-medium ordinary bonds, financial bonds, short-term perpetual bonds, perpetual or private placements), focusing on valuation recovery and potential increased allocations driven by cross-season wealth management

• Urban investment bonds: increase allocations on dips for bonds under 3 years; for bonds over 3 years, add on dips

• Industrial bonds: control duration, focus on carry trades

• Bank perpetual bonds: generally cautious, focus on opportunities in short to medium-term small and medium-sized bank perpetual bonds

Risk warning: macroeconomic regulation exceeding expectations, financial supervision surprises, market risk appetite fluctuations, institutional redemption pressures exceeding expectations, supply of traditional credit bonds surpassing expectations