Morgan Stanley Fund Wu Huiwen: Exploring Alpha Returns in the Bond Market Amid Bidirectional Volatility

Before the logic that claims to have stepped out of deflation has been disproven, the flattening of the domestic interest rate curve is still hard to describe as being on the right side—it remains in a left-side state. From the bond supply-and-demand side, given the persistently high level of global fiscal deficits, it is hard to say that the supply of ultra-long bonds becoming long-term will be completely extinguished. Therefore, whether from the supply-and-demand logic or the price-index status, there are more or less bearish factors for the ultra-long end, which makes bond investors’ behavior more focused on middle- and short-duration coupon-carrying assets. These assets have relatively high static returns and can provide ample safety margins for constructing diversified asset portfolios. At the same time, short-duration liquidity is loose and comparatively stable; holding coupon-carrying assets, and even using neutral leverage for carry trades, can meet the need for satisfactory returns.

After experiencing the big-betabull market from falling interest rates over the past decade or more, China’s domestic bond market is now facing changes. There are several factors constraining further downside repricing of bond yields. First, the slope of economic growth continuing to decline has been somewhat eased. The resilience of both exports and domestic demand confirms the resilience of economic growth, which also means bond assets are unlikely to be priced significantly from a fundamental perspective. Second, with the room and magnitude for monetary easing limited—especially in a context where the reserve requirement ratio has already been lowered to the low percentile and interest rates are at relatively low levels—there is limited room for further large interest-rate cuts. Under a low-interest-rate environment, further rate cuts provide relatively limited stimulus to total demand.

Overall, China’s domestic bond market has essentially entered a period of two-way volatility. Iterating the research and investment framework and adopting strategies to actively capture alpha are very important. In addition to capturing the coupon-carry value of middle- and short-duration assets, it is also necessary to focus on large-asset pricing factors beyond the traditional framework—for example, how commodity and equity-side pricing affects bond-allocation fund intent—as well as the frictions brought by institutional micro-level trading factors of bond investors.

Looking at institutional behavior this year, compared with last year the bond market has been much more stable and has begun a positioning-driven rally. Since the beginning of the year, the bank loan-to-deposit spread has remained at a high level. Internal credit demand is weak, but deposit retention is good, and liquidity in the interbank market is sufficient. Large banks’ internal funds transfer pricing (FTP) has declined along with the central bank’s continued large liquidity injections and the fall in negotiable certificate of deposit rates, while bond yields—after being adjusted last year—have risen to a relatively more desirable level. This has sparked configuration demand for insurance “red envelope” inflows and interbank liquidity, leading to a positioning wave since the beginning of the year. Looking at the current point in time, there is still some room for repricing, because with the second round of reforms to deposit self-discipline mechanisms, banks’ liability costs will move further downward, thereby releasing more room for allocation and carry value. In addition, conflicts in the Middle East and intermittent, pulse-like increases in commodities will also create two-way trading opportunities for ultra-long-end assets and other safe-haven and oil-price-sensitive assets. Therefore, we believe the coupon-carry value of middle- and short-duration assets is relatively solid and can provide decent base-borne returns for full-year allocations; while ultra-long-end assets can capture repair opportunities during adjustments.

(Author: Co-Director of Fixed Income Investment at Morgan Stanley Fund, Wu Huiwen)

(Editor: Shao Xiaohui )

     【Disclaimer】This article only represents the author’s personal viewpoints and is unrelated to Hexun. Hexun.com remains neutral toward the statements, viewpoints, and judgments made in the text, and does not provide any express or implied guarantees regarding the accuracy, reliability, or completeness of the information contained herein. Please note that readers should use this information only as a reference and bear full responsibility for all decisions and actions themselves. Email: news_center@staff.hexun.com

Report