As the year comes to a close, the bond market is enjoying a resurgence after experiencing adjustments in September and OctoberNotably, on December 2, the yield on 10-year government bonds dipped below 2.0% for the first time, marking a historic low that has caught the attention of conservative investorsHowever, questions loom over the sustainability of this bullish trendWill a stock market rebound influence bond prices? What does the outlook for the bond market look like going into 2025?

According to Zhao Dinglong, head of the short bond management team at Tianhong Fund, and the proposed manager of the Tianhong Monthly Treasure 30-Day Holding Bond Fund, the current risks in the bond market are relatively minorHe forecasts that the market may retain its bull run for a while longerLooking ahead to 2025, while increased volatility is likely, the fundamental determinants will still provide ample opportunities for advantageous bond allocations.

The bullish trend in bonds could very well continue, though caution is advised against the ‘seesaw effect’ of the stock market.

Since late November, the rapid decline in 10-year bond yields has catalyzed a robust bull run in the bond market

Data shows that the yield plummeted from 2.11% on November 18 to 1.95% by December 6, representing a sharp 7.6% drop in just 15 trading daysConsequently, net asset values of pure bond funds have skyrocketed, with many products reaching historical highs.

This trend was anticipated by Tianhong FundZhao pointed to the analysis conducted in early November using Tianhong’s five-cycle analysis model, predicting that by the end of November, the bond market would witness a wave of allocation forces from institutional investorsThe reasons are manifold; firstly, a comparative analysis of bank loans and bond pricing shows that bonds have reached a high point in value versus loans, as the decline in loan rates has outpaced that of government bondsThis creates a favorable situation for banks looking to allocate into bondsSecondly, from late November to December each year, banks and insurances typically engage in preemptive allocations, verifying the movement in the recent bond market where preferred securities have seen significant downtrends.

But will this favorable trend sustain? An analysis from Citic Securities indicates that based on the liquidity levels of bond funds, market divergence, and indicators of panic buying, current micro market sentiment positions are neutral to slightly elevated, and have not yet reached an overheated stage—implying that favorable momentum remains.

Zhao Dinglong also highlights the macroeconomic drivers of this year’s bull market, emphasizing that this market trend is primarily fueled by excess liquidity, unlike previous cycles dominated by institutional agencies and leverage

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Currently, both institutions and individuals prefer to allocate surplus funds into the bond market after weighing the returns of real estate and stocks versus bonds.

Furthermore, from the vantage point of both the bond and stock markets, Zhao analyses the upcoming trends for 2024, noting that the stock-bond market dynamics will showcase distinctive characteristicsWhile the bond market will likely continue thriving, the stock market appears to be following a dividend-oriented trend, suggesting that there’s a logical synergy between the two.

However, Zhao cautions that as risk appetite in the stock market increases, the inflow of funds into bonds may see intermittent drop-offs, prompting a potential correction in bond pricesOverall, though, given the relatively low risk of the bond market, a sustained bullish climate is plausible, encouraging a cautiously optimistic outlook among investors.

Looking to 2025, Zhao predicts that the market is currently navigating through a phase of policy stimulus, with the potential for new measures post-central economic meetings likely to influence market conditions

This could present an advantageous opportunity for additional investmentsBy around March or mid-year of the next year, bonds may realign with fundamental drivers, with macroeconomic and policy cycles once again favoring bond markets.

In Zhao's view, investors should look for trading opportunities during market fluctuations, focusing on position layering and emotional cyclesEffective high-low trading strategies could involve tracking the holdings of leading mainstream funds, increasing allocations when other funds display lower positions, and executing trades according to current market percentilesIn instances of high percentile readings, corresponding reductions in holdings should be implemented.

Zhao perceives that under a macro and policy environment potentially adverse to the bond market in 2025, the bond sector may face around six months of pressure, leading to heightened volatility

The risk of widening yield spreads exists, with short-term bonds appearing to present better value under current monetary policies, with intermittent trading opportunities arising from institutional behavior and positioning cycles.

It’s also notable that the Tianhong Monthly Treasure 30-Day Holding Period Bond Fund, with Zhao Dinglong set as the proposed manager, is currently open for subscription.

This fund is characterized as a pure bond fund, allocating over 80% of its assets to bonds and steering clear of stocks and convertible securities, insulating itself from the impacts of equity market fluctuationsBy structuring its holdings into tiers—base holdings, enhanced allocations, and public portfolios—it aims for a balanced approach towards yield enhancement, drawdown control, and liquidity management