China’s bond market maintained low volatility throughout May, influenced by multiple factors including monetary policy implementation, unexpected China-U.S. joint statements, and tightening liquidity conditions. Treasury yields briefly spiked before stabilizing, gradually revealing their investment appeal.
Deposit Rate Cuts Reshape Investment Dynamics
The recent reduction in deposit rates has significantly impacted market behavior. Analysts note that major banks’ swift and substantial rate cuts reflect mounting net interest margin pressures. While lower liability costs may boost banks’ bond allocation, potential fund outflows could create temporary market stress.
For broader asset management, the rate cuts typically trigger increased demand for credit bonds, with yield spreads beginning to narrow within 3-4 weeks and the process lasting 2-3 months.
Equities Show Selective Recovery as Economic Challenges Persist
While China’s A-share market continues its recovery, performance remains uneven. Stocks face resistance near yearly highs as corporate earnings struggle to rebound amid weak economic recovery. This environment of bond market volatility coupled with selective equity opportunities highlights the strategic advantage of balanced hybrid funds.
Zhao Xiaoqiang, Director of Private Wealth Management at MSJY Fund, describes the macroeconomic landscape as “a complex mix of bullish and bearish factors.” Persistent real estate declines and weak domestic demand contrast with potential short-term export boosts ahead of tariff changes, creating market uncertainty and bond yield fluctuations.
Investment Strategy for Current Conditions
With bond markets likely to remain volatile, investors are turning to diversified asset allocation. Balanced hybrid funds, featuring lower interest rate sensitivity than pure bond funds and greater strategic flexibility, have emerged as compelling options.
The MSJY Pengcheng Hybrid Fund (Class A 004710, Class C 007749) exemplifies this approach with its “fixed-income foundation + equity enhancement” strategy. As of Q1 2025, the fund’s Class A shares delivered:
- 2.74% return over 6 months (vs. 0.53% benchmark)
- 4.10% return over 1 year (vs. 3.68% benchmark)
- 8.89% return over 5 years (1.76% above benchmark)
- 31.01% since inception (16.85% above benchmark)
(Past performance does not predict future results.) The fund has demonstrated resilience through multiple market cycles while maintaining strict drawdown control, positioning it as a strategic choice for moderate-risk investors.
Market Outlook: Policy and Events to Drive Future Direction
Analysts suggest bond market risks partially released after May’s tariff developments, with future movements likely dictated by the interplay between monetary easing and external shocks. In this environment, investment strategies that balance stability with growth potential may prove most effective for navigating China’s complex financial landscape.
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