The year 2024 has emerged as a remarkable period for China's bond market, showcasing robust performance that stands out on the global stageWhen compared to major asset classes worldwide, Chinese government bonds have often outperformed peers, largely driven by a concerted focus on long-term bonds characterized by their substantial leverage potentialIn an exciting turn of events, the launch of the 30-year government bond ETF has captured significant investor interest, leading to an impressive price surge of nearly 25% over the year.

This bullish sentiment in the bond market has seemingly been propelled by a wave of passive investment, which is now extended to include not just government bonds but also corporate credit bondsObservers note that with an average duration of under three years for credit bond ETFs, some investors still retain a preference for the 30-year government bond ETF, which may provide more significant duration exposure

Although AAA-rated credit bonds are recognized for their quality, they often lag behind government bonds in terms of liquidityNonetheless, investment managers express optimism about credit bonds as opportunities arise for their prices to catch up in the wake of a more favorable interest rate environment.

The emergence of credit bond ETFs follows the surge of long-term government bond ETFsIn a climate of optimism, bond index funds have undergone robust growth, positioning 2024 as a pivotal year for this segmentData from Wind indicates that as of the third quarter of 2024, bond index funds—including convertible bond ETFs—have surpassed the significant milestone of 10 trillion yuan in total assetsThis expansion reflects a diversified investment landscape composed of comprehensive bonds, interest rate bonds, credit bonds, interbank certificates, and convertible bondsFund structures are primarily classified into bond ETFs and over-the-counter index funds.

Currently, the over-the-counter index funds dominate the landscape, accounting for a substantial portion, while bond ETFs, despite their rapid development, hold a smaller market share

As of the third quarter of 2024, over-the-counter index funds total roughly 8.809 trillion yuan, making up 86.5% of the marketIn contrast, bond ETFs, limited to just 20 products, represent only 13.5% of the total assets at 1.371 trillion yuanHowever, the growth trajectory of bond ETFs has been striking; they recorded a remarkable 70% increase over 2023 year-end figures, outpacing the broader bond index fund growth rate of 31%.

The standout product of the first half of 2024 has undoubtedly been the 30-year government bond ETFAgainst a backdrop of a strengthening bond market, long-end rates have seen a rapid decline, with the yield on 30-year bonds falling from almost 3% at the beginning of the year to a range of about 1.9% nowPresently, there are only two market offerings available in the 30-year government bond index fund space, both structured as ETFs.

ETFs boast several advantages such as the ability to be traded on the stock exchange like regular stocks, offering high transparency, low fees, and tax benefits, which highlight their appeal

In contrast, traditional index funds primarily operate through fund companies or third-party sales platforms, with prices calculated based on the fund's net asset value after market closeThe superior liquidity presented by interest rate bonds has led many investors to seek credit bonds, which still retain "catch-up" potential within the current environmentInsights from industry professionals underscore the lagged performance of credit types, signaling the widening of credit spreads and unveiling of value opportunitiesAnalyzing supply and demand trends for 2025, mid to high-grade credit bonds also appear to present considerable deployment value.

In this evolving context, credit bond ETFs have made their entranceThe first wave of credit bond ETFs linked to the Shenzhen Benchmark Market making Credit Bond Index received approval this weekWith interest rate bonds undergoing significant yield declines, the 10-year government bond yield has dropped to 1.7%, signaling that long-term bonds now reflect anticipated cuts of over 30 basis points

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Investment managers from Bosera Fund emphasize the growth potential inherent in credit bond index funds, noting a currently limited number of such funds availableAs yield declines continue for both short- and long-term government bonds, the advantages of index fund fee structures and their inherent qualities may become increasingly appealing to investors seeking to achieve extra return through active management.

The recently launched credit bond ETF, which tracks the Shenzhen Market-Making Credit Bond Index (921128), consists of company and enterprise bonds drawn from an official list of market-making bonds considered by the Shenzhen Stock ExchangeThese benchmark market-making bonds are selected by the exchange and must conform to specific criteria, including maintaining an AAA credit rating and having a total outstanding amount exceeding 1.5 billion yuanIncorporating upwards of 10 billion yuan in certain growth directions concerning green and private-sector bonds will be permitted if their issuance conforms to reduced size thresholds

Notably, compared to traditional mid-to-high-grade credit bonds, benchmark securities boast both greater issuance volumes and better liquidity.

Globally, bond ETFs constitute a significant segment of the broader ETF market; however, in China, the figures are comparatively modest, currently standing at around 10%. This remains far below the rates seen in more matured markets such as the United States, where nearly 40% of bond investments are categorized as passiveThe landscape is slowly but surely changingAs of the third quarter of 2024, the entire Chinese market comprises only 20 bond ETFs with a current total scale surpassing 130 billion yuan, resulting in a lower market share compared to bond index funds (13.5%). Commenting on the situation, Zhang Lei, a fund manager, highlighted that the bond ETF sector started developing relatively late, leading to a scarcity in product availability; furthermore, transaction activity has historically focused more on the interbank market rather than on exchange-traded bonds.

Nevertheless, there is gradually growing optimism regarding the issuance of exchange-traded bonds, which can substantially fuel the growth of this sector

Investor recognition and embrace of bond ETFs are progressively gathering momentumAs evidenced by the tremendous increase in the bond ETF scale compared to bond index funds during 2024, individual investors are beginning to acknowledge and allocate assets towards bond ETFsWith enhanced connectivity mechanisms in China's bond market and increasing vibrancy in exchange-traded securities, expectations remain that the appetite for bond ETFs will continue to evolve positively.

Looking ahead into 2025, market analysts express a prevailing belief that the bullish sentiment within the bond market will persist, especially concerning mid to high-grade credit bonds, which hold notable allocation valueFrom a medium to long-term perspective, Zhang emphasized the importance of evaluating nominal growth alongside capital return deterioration in context to higher actual interest rates, highlighting a certain downtrend potential for bond yields

In comparison with global counterparts, China's actual interest rates outpace most nations, underscoring that the relative high levels of bond yields may warrant future adjustments downwardCoupled with dropping prices in industrial commodities and a repeat of historically low inflation levels, the efficacy of future drop strategies remains crucial.

Recent discussions have hinted at a monetary policy shift towards “moderate easing.” Fiscal approaches have emphasized the need for "more proactive fiscal policies" and “extraordinary" counter-cyclical measures, both of which could contribute positively to the bond marketAnalysts from CITIC Construction express expectations of timely reserve ratio and interest rate cuts in the first quarter of 2025 that could catalyze declining bond yields.

Furthermore, as noted by the Research Department of South Silver Wealth Management, routine adjustments in reserve ratio and interest rates could take place twice in 2025. Historical trends indicate that such reductions typically align with periods of weaker social financing and property market performance