As 2025 marks the dawn of a new chapter in the bond market, the predicament it faces could be likened to an unexpected chill in springDespite the momentum seen at the beginning of the year, the landscape appears troubled, casting shadows of doubt on the strength of bond fund investments.

The shift in the net value curve of bond funds post Spring Festival has introduced a sense of fragility among investorsFor instance, the 30-year treasury futures have fallen over 3% from their peaks, and mixed signals abound as durations of bond indices show a roughly 0.6% decline, compounding fears with negative annual performance since the onset of 2025. At such a poignant moment, a thoughtful exploration of the rationale for holding bond funds appears increasingly urgent.

Can data and logic truly demonstrate that bond funds still hold value?

01 What caused the decline in bond funds since early this year?

The challenges manifesting within the bond market underline various factors.

Looking towards 2025, expectations for the bond market hinted at a spirited continuation; yet, as is often the case, fragility lies beneath the surface.

The current phase of adjustment feels abrupt, but tracing back through market history reveals roots of anticipationThe price of bonds typically inversely correlates with market interest rates, and the recent shift within the market has been a product of tangled influences.

Several interwoven elements have affected the bond market's recent adjustments.

Firstly, the strong bullish sentiment from 2024, propelled by a single-sided trend, has led to concurrent positions across the market

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Following a dive in the ten-year government bond yield to historic lows, any slight shift becomes a catalyst for volatility, akin to the precarious trading atmosphere seen during peaks in the A-share market.

Secondly, prior anticipations of interest rate cuts faced new constraints as surprising social financing figures surfaced in January, all occurring under the careful framework aimed at stabilizing the currencyThe delayed cycle of interest rate reductions by the Federal Reserve further complicated the picture, nudging interest rates gently upward as market predictions shifted.

Thirdly, with post-holiday capital influx, the previous funding stress witnessed at the end of the previous year has somewhat easedYet compared to prior years, sluggish bank capital return and other external pressures—like the rapid issuance of local debts—still maintain a tight liquidity landscape, compounding the fluctuations we witness in current rates.

Moreover, investor sentiment shifts borne from the recent rise of technology stocks—partly driven by the AI revolution—risk dilution of equity benefits from fixed-income products, reshaping the investor's landscape.

The bond market's quick adaptation thus becomes a measure of investor sentiment, reflecting a distinct “pendulum effect” in market behavior.

02 When might the bond market stabilize?

From stormy turbulence to gentle breezes—what lies ahead?

Volatility becomes a harmonious law of capital markets, as no asset can uphold the "myth" of endless growth amidst fluctuations

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Every adjustment within the bond market indeed presents a reevaluation of expectations, policies, and the prevailing trading structure.

Patterns emerge indicating that the dip in the bond market primarily stems from a blend of crowded trading, tightened policies, and shifting risk appetitesNevertheless, swings in the market do not always signal a crisis; within shadows of doubt, flickers of dawn occasionally emerge.

The prevailing theme in the Chinese bond market remains “bear in short glimpses, bull for extended periods.” The anticipated recovery will eventually ariseAdjustments may even render improved ratios of return over time.

However, decoding the signs of stabilization within the bond market requires an analytical approach considering policy, liquidity, and fundamental economic conditions.

For the short term—

While tight liquidity prevails, rising bond yields may escalate financing costs for government debts, hampering de-leveraging efforts.

The picture grows bleaker as banks, amidst funding pressures, initiate higher interest rates on depositsActions such as high-interest deposit certificates risk further eroding banks' net interest margins, diverging from the objective of servicing the real economy effectively.

In this light, drastic rate alterations appear misaligned with monetary policy intentions; the central bank may intervene to cool market temperatures, injecting liquidity through measures like open market operations, increasing repurchase agreements, or reactivating government bond purchases.

On the long-term spectrum—

Interest rates, fluctuating as part of average profit margins, will inevitably shift in alignment with economic transitions, cementing low rates as a new norm.

This "stress test" will, like its historical predecessors, glide from chaos toward tranquility.

03 What provides the grounding amidst this fluctuation?

Amidst changing tides, why are bond funds still worth holding?

At this juncture, the questions on every investor’s mind gravitate toward the viability of maintaining bond funds through this period: Can one indeed stay the course, or face losses down the line? Is there value to be found in persisting with bond fund investments over the long haul?

Let the data speak.

—Bonds are income-bearing assets, providing a solid foundation through regular coupon payments.

Bond funds primarily invest in bonds, which yield returns.

Consider a five-year bond with a principal amount of 100 yuan and a coupon rate of 3%. Each year, assuming no defaults, this bond yields 3 yuan annually, resulting in the complete recovery of the principal at maturity.

The presence of coupon payments as a "safety cushion" cushions the impacts of capital losses, safeguarding against the permanent loss of principal, and creating opportunities for returns over time.

—China's bond market consistently exhibits patterns of “short bears, prolonged bulls,” demonstrating that time itself triumphed over volatility.

Consequently, while bond fund values may experience temporary retractions under market turbulence, the intrinsic quality of bonds—yielding income and exemplifying fixed-income attributes—provides reassurance against drastic declines if no major defaults transpire.

Utilizing the WindBond pure bond fund index as a benchmark, analysis over the past decade illustrates how investments made at peaks could still recover from downturns, eventually reaching new highs.

—Regardeless of fluctuations, the pure bond fund index recorded positive yields for 15 consecutive years.

The bond market has weathered numerous bull and bear cycles over the last decade, demonstrating consistent annual positive performance across various indices since 2010.

Even during tumultuous years marked by downturns in both equities and bonds, such as in 2013 and 2018, relevant bond fund indices managed to yield positive returns, carving a niche as the preferred defensive allocation.

The path forward unveils that timing the market is not the ultimate determinant of bond fund investments; rather, the core objective remains discovering products that synergize with individual risk profiles.

Acknowledging the potential volatility emanating from accumulated gains during a bull cycle becomes crucial, enabling investors to approach future fluctuations from a well-informed standpoint.

Short-term shifts may be inevitable, but a long-term outlook reveals an unfolding narrative in China’s economic progression.

This narrative spans from resolving legacy debts to heralding a soft landing for real estate, from cultivating new productivity to enhancing total factor productivity; each strategic pivot signals a universal agreement:

The nurturing environment of monetary policy, combined with a decline in interest rates, is set to reconstruct the foundational logic of wealth management.

In light of the ongoing transition within the economic landscape, analyzing investor allocation demands alongside numerous influencing factors reveals the bond market remains in a relatively favorable condition.

Thus, bonds themselves transcend the binary approach of "to buy or not to buy," emerging as an essential component in investment portfolios, providing stability—the cornerstone of effective asset allocation, and warranting strategic long-term holdings.

In this context, perhaps the navigation system’s advice rings true: "Despite congestion ahead, you are on the optimal path."

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