Financial Services Association, June 14 (Reporter Wang Hong) There are also quite a few risks hidden behind the “bull market” of bond funds. Since this year, the return on investment of some bond funds has increased, and the annualized yield of some products has even exceeded 10%, which has attracted the attention of many investors.

Industry experts have analyzed that this round of debt-based market has a lot to do with the decline in bond interest rates; this kind of high yield is not sustainable. Normally, when interest rates are declining, bond prices rise, and large amounts of capital are invested in the bond market, exacerbating the imbalance between bond supply and demand. Interest rates decline further, and prices continue to rise, forming a positive feedback effect; conversely, when interest rates rise, there is also a negative feedback effect. Long-term bond yields will not continue to be low. Investors are taking over at a high level in the bond market, and there is a high risk of future investment losses.

Recently, the central bank has made several public statements reminding investors to pay attention to related risks. Some international investment banks, such as Macquarie Group, mentioned that the Chinese bond market needs to absorb the lessons of the Bank of America's Silicon Valley crisis. Investors hold large amounts of long-term US bonds, which will reveal major risks after changes in the direction and level of interest rates.

The current debt base's strategy to pursue high returns is mainly to prolong the term. The income from debt-based investment comes, on the one hand, from interest income during the time the bond is held, and on the other hand, from capital gains generated by changes in bond prices.

According to industry insiders, interest rates on bonds are negatively correlated with prices. If interest rates fall, prices will rise; the long-term holding of bonds will also affect debt-based investment income. The margin of change in bond prices (capital gains) can be viewed as the product of changes in bond interest rates and the long-term duration of bonds.

For example, with interest rates also falling by 1 percentage point, the price of a 3-year bond would rise 3%, while the price of an 8-year bond would rise 8%.

Recently, due to the “asset shortage,” some institutional investors are unable to find assets with good returns. In particular, after interest rates on bank deposits were lowered, this further highlighted the comparative advantage of bond funds. These institutional investors rely more on lengthening the term of bonds to pursue high returns. In fact, they are also “risking” to make money, and interest rates in the game market will fall.

The long-term multiplier effect on debt-based investment returns goes both ways. If interest rates on bonds rise in the future, the longer the term, the return on capital gains from debt-based products will also decrease exponentially, and the risk will increase accordingly. Cases of this reverse effect have also occurred in recent years.

Looking back at the bond market in 2019-2020, due to the pandemic, the yield on 10-year treasury bonds first fell by nearly 80 basis points during the half-year period from November 2019 to April 2020, then rebounded by about 80 basis points from May to November 2020.

Assuming that a debt-based product is fully held in 10-year treasury bonds, if investors buy it at a low interest rate, that is, at a high price, and hold it until November 2020, they will lose about 6% in half a year, which translates to an annualized yield of 10% or more. At that time, bond funds experienced extensive losses, and sharp redemptions from investors exacerbated the continued decline in the market and further amplified losses.

Industry insiders pointed out that the yield data for debt-based products should be viewed rationally. Normally, the rate of return advertised by the market is the annualized rate of return, which is calculated based on the actual rate of return over a period of time, and changes dynamically.

For example, if the net value of a debt-based product increased from 1 yuan to 1.01 yuan in the past month, this means that the product's yield for the month is 1%, and the converted yield can be as high as 12%. However, for bond funds, a monthly yield of 1% is already a very high return, and the actual return for one year is far less than the expected yield of 10% or more. Instead, the probability of a potential risk of loss is increasing. In the last round, many public investors found it difficult to accept the losses of bond funds. For the most part, they also entered the market against the backdrop of excessive yield expectations.