On August 29th, Caixin (edited by Li Xiang) reported that global capital markets have been generally volatile over the past month. With the approach of the Fed's interest rate cuts, many domestic banks have begun to consider reducing the interest rates on USD deposits. Currently, there are not many products with rates over 5%. At the same time, from a global perspective, the high fluctuation of the China-U.S. interest rate spread has made QDII bond funds, as a convenient way to invest in U.S. bonds using RMB, popular among many investors.

With overseas markets gradually rebounding and the increasing expectation of a Fed interest rate cut, the U.S. bond yields have sharply declined. QDII bond funds are showing signs of recovery, and recent QDII bond products investing in U.S. bonds have performed well, with many achieving returns of over 6% since the beginning of this year, and some even reaching 10%.

Market participants believe that in the context of the Fed's interest rate cuts, the QDII bond fund is indeed a good opportunity in terms of product yield comparison. However, attention should still be paid to interest rate and exchange rate risks. Considering that the current U.S. bond interest rate curve is still inverted, the cost-effectiveness of short-duration U.S. bond investments that mainly focus on high coupon yields is relatively higher.

Several banks have taken the lead in reducing the interest rates on USD deposits.

Since the beginning of this year, relatively high-interest USD deposits have become the favorite choice of depositors. As early as the beginning of this year, some domestic banks offered USD deposit interest rates of over 5% for deposits starting from 0.01 million USD, becoming an important product channel for attracting deposits.

Industry insiders stated that the USD deposit interest rate mainly changes in line with the adjustment of the federal funds rate. With the continuous decline in RMB deposit rates at the beginning of the year, combined with expectations of reserve requirement and interest rate cuts, the widening of the China-U.S. interest rate spread has driven up the yield of wealth management products linked to USD deposits. However, industry insiders also pointed out at that time that it would be difficult to maintain such a high interest rate in the future under the expected Fed rate cuts.

With the market's growing expectation of a Fed interest rate cut in September, many domestic banks have already begun to proactively reduce the interest rates on USD deposits. Industry insiders in the banking sector pointed out that the future will continue to adjust the yield level of USD deposit products based on the frequency of Fed interest rate cuts. Currently, the main term for adjustment is the long end.

The partial inversion of the term yield of the US dollar wealth management products also reveals some clues. For example, for the US dollar deposits of 0.01 million US dollars in Bank of Jiangsu, the interest rates for terms of 1 month, 3 months, 6 months, and 1 year are 5.05%, 4.95%, 4.8%, and 4.7% respectively. It shows that the longer the term, the lower the annualized interest rate.

Dong Ximiao, Chief Researcher of Zhonglian, stated that as the expectation of interest rate cuts by the Federal Reserve strengthens, the value of US dollar assets may be affected, which in turn affects the actual returns when converting back to the home currency. For ordinary investors, if they already hold US dollars, they can still choose US dollar deposits to lock in high interest rates. However, due to the existence of swap transactions, it is not recommended to allocate US dollar wealth management products through currency exchange at this time.

The income of overseas QDII assets is rising against the trend.

Under the deepening structural shortage of domestic assets, many investors have turned their attention to the overseas market. QDII bond funds, as a convenient way to invest in US bonds with renminbi, have also been favored by many investors.

QDII bond funds refer to investment funds established in China and approved by relevant departments of the state to engage in securities markets overseas, such as bonds and other securities. For ordinary investors, holding QDII bond fund shares is equivalent to indirectly holding bonds in overseas markets.

Industry insiders point out that the underlying assets of QDII bond funds are overseas bonds (mainly US dollar bonds), and their returns mainly come from interest income, capital gains, and foreign exchange gains and losses. From a historical perspective, the performance of QDII bond funds in different years is influenced by multiple macro factors, including the interest rate levels of China and the United States, exchange rate levels, interest rate hike and interest rate cut cycles, and so on.

Currently, the interest rate differential between China and the United States is at a historical high. From the perspective of interest income and capital gains, the investment cost-effectiveness of US bonds is better than that of domestic bonds. In addition, considering that the central level of US inflation is expected to be relatively higher than before the pandemic, market participants believe that even if the Federal Reserve enters an interest rate cut cycle in the future, the bottom of the interest rate cut is expected to still be above 3%. The medium- to long-term cost-effectiveness remains. At the same time, overseas credit spreads are relatively more reasonable, as the credit spreads for the same issuer in overseas markets are usually much higher than those in the domestic bond market. Therefore, funds that invest in credit bonds also have additional spread income.

With the recent warming of overseas capital markets, QDII fund returns have clearly increased. The overall scale has exceeded 500 billion yuan. Several QDII funds have opened up limited purchases or suspended subscriptions due to insufficient quotas, but they have not yet restricted investors' enthusiasm for using QDII funds to 'go global'.

According to the recent data released by the China Securities Investment Fund Association, as of the end of July, the total size of public funds reached a new historical high of 31.49 trillion yuan, an increase of 404.218 billion yuan compared to June, with a growth rate of 1.3%. The scale and share of QDII funds are showing strong growth momentum, with the QDII fund size exceeding 500 billion to 523.673 billion yuan, and the share reaching 579.459 billion shares, a month-on-month increase of 5.18% and 4.68% respectively.

Looking at the weekly return rate, according to Wind data, the performance of QDII funds is relatively good, with an average weekly return of 1.87% in the past week. Overall, QDII funds continue to outperform other alternative investment funds (0.87%), money market funds (0.02%), bond funds (-0.16%), FOF funds (-0.93%), and stock funds (-1.47%).

Looking at the overall performance this year, out of 25 QDII bond funds in the market (after consolidation), except for Changxin Global Bonds (QDII), all have recorded good positive returns this year, such as Huaxia Greater China Credit Bonds (QDII), Huaxia Income Bonds (QDII), with yields even reaching 10%.

However, due to insufficient quotas, most QDII products have encountered varying degrees of purchase restrictions. From the products that have increased quotas since August, it can be seen that either the performance is outstanding or the investors themselves are highly attentive, such as the Huatai US Dollar Bond ​bonds (QDII).

Market participants indicate that in terms of comparing product returns, under the backdrop of the Fed rate cuts, QDII bond funds indeed present a good opportunity, but attention should still be paid to interest rate risks and exchange rate risks. This requires investors to have a certain level of risk tolerance. Currently, the customer base investing in QDII funds tends to be younger, daring to try out new markets for investments, and overseas markets are likely to become increasingly mainstream investment markets.

Industry insiders point out that when selecting QDII bond funds, it is necessary to consider one's own risk preferences and specific circumstances. Considering the current inverted curve of US bond interest rates, short-duration US bonds with high coupon income are relatively cost-effective. However, if the investing group is unaware of the underlying investment direction of QDII bond funds, it is advisable not to rush into this trend.