In recent times, the credit bond market has faced significant challenges due to the 'seesaw effect' between stocks and bondsWith an outflow of funds and heightened pressure on selling, yields have continued to climb, resulting in a decline of market sentimentThis transformation underscores the intricate interconnectedness between different asset classes within the financial ecosystem.

However, as the market gradually transitions into a structural recovery phase, distinct opportunities are beginning to surface, particularly within credit bonds, especially high-grade short-to-medium-term onesExperts from the industry suggest that investors should keep an eye on municipal investment bonds and certain shorter-duration debts, employing a more strategic approach to navigate market fluctuations while awaiting favorable policy developments that could provide better allocation opportunities.

Since late September, the overall performance of the credit bond market has been relatively weak

Analysts attribute this downturn to a combination of increasing long-end interest rates in the bond market and a shift of capital inflows towards the stock market due to the aforementioned 'seesaw effect.' Furthermore, this instability has been exacerbated by the heightened vulnerability of non-banking institutions’ liabilities.

A report issued by Minsheng Securities suggests that amidst prevailing liquidity concerns, the credit bond sector has mirrored the adjustments seen in government bonds, with the extent of credit bond corrections surpassing government bondsThis situation is reflected in the widening credit spreads that characterize the current market environmentA detailed analysis shows that the decline in long-end bonds has been more pronounced compared to their medium-to-short duration counterparts.

Data from Choice has validated these observations; between September 25 and October 31, credit bond yields experienced upward volatility, with one-year credit bonds (rated AAA) seeing yields rise by 43 basis points to reach 2.39%, while the three-year bonds saw a variation of up to 46 basis points, lifting yields to 2.49%.

From the primary market perspective, the hurdles for issuing credit bonds have intensified, as the increasing issuance rates have prompted a rise in the number of cancellations

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Data from Chuangye indicates that as of October 30, 83 different credit bonds had been canceled in October alone.

Focusing on issuance rates, on October 31, the five-year private debt issuance by AA+-rated Red River Development Group reached a coupon of 6.7%, while another comparable five-year bond from the same issuer stood at 6.5%. This exemplifies the tightening conditions in the credit market.

Why the credit bond market is cooling down is a question resonating among many investorsWhile the liability side of wealth management products does not face immediate pressure from mass redemptions, many institutions are taking preemptive redemption measures, leading to increased selling pressure on credit bondsAnalysts from Huaxi Securities noted that while wealth management products are still engaged in net buying of credit bonds, funds have pivoted towards net selling, with daily net sales exceeding 10 billion yuan between October 23 and October 25, echoing the sell-off trends observed in late August.

According to Liu Lu, the Chief Analyst for Fixed Income at Ping An Securities, the predominant cause of the lackluster performance in the credit bond market is the weakening demand driven by policy guidelines, further exacerbated by the dilution effect of increased government bond supply.

Multiple heads of private debt funds have conveyed their observations of substantial redemption pressures

Investors are seeking to redeem funds for stock market investments or holding onto cash in anticipation of better stock opportunitiesWhile many credit bonds currently present excellent value propositions, pressure to sell at a discount emerges as a necessity in this market environmentThis challenge is compounded by a scarcity of buying interest, as most institutions remain cautious about potential future valuation risks, which have perpetuated the ongoing downturn in credit bonds over recent months.

As investors ponder when the credit bond market might find a turning point, Minsheng Securities highlighted that throughout the year, there has been continual compression of credit risk premiums and an extreme narrative around 'liquidity being king.' The adjustment mechanisms of the market hint that sustained extensive corrections in the credit bond market may soon reach their limits, especially under ongoing fundamental conditions and sentiment contests.

On a more optimistic note, experts from Industrial Securities believe that the peak of redemption pressures from non-banking institutions might have already passed

Following prior valuation adjustments, the cost-effectiveness of credit bonds has improved, and participation opportunities are becoming more apparent.

Lu Qiting, Assistant General Manager of the Fixed Income Investment Department at Yongying Fund, remarks that short-term fluctuations fueled by emotions are likely affecting adjustments and redemptionsHowever, there remains a positive outlook for the bond market in the medium to long termFor instruments experiencing significant short-term fluctuations, maintaining liquidity reserves will be essential to mitigate risks, whereas for instruments with stable liabilities, active search for allocation opportunities during these adjustments will be warranted.

Considering future investment strategies for credit bonds, various market participants assess that amidst the current economic and policy environment, fiscal policy and stock market strategies are expected to remain dynamic, with market risk appetites showing signs of recovery

In this context, they recommend that investors focus on short to medium-term bonds as an avenue for investmentConcurrently, the compression of high-yield assets continues, and large-scale debt swaps could effectively mitigate credit risks, presenting a chance for investors to explore lower-rated credit opportunities for potentially higher returns.

Observing the characteristics of credit bond adjustments over the past couple of years, it is noted that those characterized by better liquidity typically experience quicker valuation recoveriesHigh-grade, short-to-medium-duration bonds often regain their price integrity rapidly, with liquid municipal bonds being among the first to recover valuations.

Consequently, Huang Weiping advises investors to gradually pay attention to high-grade credit bonds maturing in three years or less, as well as short-term transaction opportunities in higher-rated municipal bonds

Furthermore, a cautious approach should be taken with bonds maturing within a range of three to five years, especially four-year bonds, which may present opportunities for effective tradesNotable includes those with longer durations, at 10 to 15 years, that have experienced notable price reductions that improve their value-to-price ratio, potentially leading to increased capital gains.

Finally, when selecting regional municipal bonds, Liu Lu emphasizes a focus on key areas for debt resolution, suggesting that strategies should explore opportunities for early redemptionSupport for regions under significant debt pressures is expected to surge from local debt swaps, while within the financial debt sphere, it is advisable to monitor the trading opportunities for higher-grade bonds alongside the coupon opportunities stemming from lower-grade bonds subject to favorable policy adjustments.