As the year comes to a close, the bond market, after a period of adjustment in September and October, has shown signs of recovery and stabilizationParticularly noteworthy is December 2nd, when the yield on 10-year government bonds dipped below 2.0% for the first time in history, garnering significant attention from conservative investorsThe questions looming now are whether this warming trend in the market will persist, how a rebound in the stock market might influence bond market dynamics, and what the future holds for bonds leading into 2025.

Zhao Dinglong, the head of short-bond management at Tianhong Fund and designated manager for the Tianhong Monthly Treasure fund, provided insight into the current bond market landscapeHe indicated that, overall, the current bond market poses relatively low risks, suggesting that the bull market could continue for some time

He anticipates increased volatility in the bond market by 2025; however, he believes that there will still be ample opportunities for sound investments based on fundamental analysis.

The ongoing bull market for bonds seems likely to continue, yet caution is advised regarding the inverse correlation with the stock market.

Since late November, the bond market has entered a more pronounced bull phase, propelled by a sharp decline in 10-year treasury yieldsStatistics from Wind show that from November 18 to December 6, the yield fell from 2.11% to 1.95%, marking a 7.6% decrease over just 15 trading daysThis trend has led to a rapid increase in the net value of pure bond funds, with numerous products hitting all-time highs.

Tianhong Fund had predicted this trend early on

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Zhao pointed out that in early November, employing Tianhong's five-cycle analysis model, it was anticipated that by the end of November, institutional force would be present in the bond marketHe elaborated on two key reasons for this: first, a comparative analysis of bank loans and bond prices indicates that bonds have become more valuable than loans because rates for loans have declined more sharply than government bondsThis creates a favorable condition for banks to allocate more towards bondsSecondly, during the end-of-year period from late November to December, banks and insurance companies typically engage in advance allocation strategies for the upcoming year, as recently validated by the pronounced decline in several preferred bond categories.

Will the current trend endure? Looking at the micro aspects of market trading structures, Guotou Securities argues that based on various indicators such as bond fund duration levels and market sentiment, the present market indicators sit at a neutral to slightly high level, far from the extreme hot state

Hence, the market retains some momentum in its movements.

From a macroeconomic viewpoint, Zhao provided a broader analysis of this year’s bond bull market driversHe noted that the current bond bull market is primarily driven by excess liquidity, which contrasts with previous trends characterized by institutional dominance and leveraged bull runsPresently, both institutions and individual investors are leaning towards allocating their surplus funds into the bond marketParticularly for individual investors, after comparing returns across different asset types such as real estate and stocks, bonds are emerging as a more attractive investment option.

Moreover, Zhao analyzed the anticipated trends for both the bond and stock markets in 2024 and beyondHe highlighted that the bond market is expected to maintain its bullish characteristics in contrast to the stock market, which is anticipated to exhibit dividend-like trends

There exists a logical thread linking the behavior of both markets.

However, Zhao cautioned investors that with the rising risk appetite in the stock market, the inflow of funds into the bond market might face temporary withdrawals, potentially leading to some corrections in bond pricesNevertheless, the overall assessment remains optimistic regarding the bond market due to its relatively low risk and the likelihood of sustaining a bull market in the near future.

Expectations for increased volatility in the bond market should be noted, making trading opportunities worthy of consideration.

Looking toward 2025, Zhao forecasts the market is currently in a transitional phase between the first and second rounds of policy stimulationAfter key meetings and the central economic work conference, a new round of policy interventions is likely to affect the market, potentially offering a strong buying opportunity

By around March to mid-year, it is expected that bonds will realign with fundamental influences, with macroeconomic and policy cycles potentially generating positive effects once again.

Zhao emphasized the need to seek short-term trading opportunities within a fluctuating market by closely monitoring both sector positions and the sentiment cyclesTo optimize trading strategies characterized by high buy-low and sell-high differentials, one can track the position levels of leading mainstream funds and increase allocations when other funds are at lower positions, leveraging the latest quantile systems for operational decisionsConversely, one should consider reducing positions when quantiles are elevated.

From Zhao's perspective, the bond market in 2025 will likely face considerable pressure over six months, given the prevailing macroeconomic and policy conditions that tend to disfavor bond market performance

Consequently, increased overall volatility in bond prices is anticipated, particularly with risks associated with widening yield spreadsFavoring short-term bonds remains a prudent choice, and tactical trading opportunities could arise from banks’ allocation behaviors and positioning cycles.

It’s also notable that the Tianhong Monthly Treasure 30-day holding period bond fund, overseen by Zhao Dinglong, is currently being offeredAs a pure bond fund, over 80% of its assets are allocated to bonds, steering clear of equities, convertible bonds, and other equity-related investments, which helps insulate it from the fluctuations of equity marketsBy structuring portfolios across base holdings, augmented positions, and enhancement layers, it aims to strike a balance between yield enhancement, drawdown control, and liquidity management