As the first half of the year draws to a close, financial markets are exhibiting a split performance. End-of-quarter liquidity fluctuations in the bond market have put pressure on the short end while causing volatility in the long end, narrowing the performance gap between long-term and short-term bond fund averages to just 0.01 percentage points. Concurrently, money market fund yields continue to explore new lows, with over 200 products across the market seeing their 7-day annualized yields fall below 1%, prompting several funds to repeatedly adjust management fees as contractual clauses are triggered. Analysts note that this low-yield environment is fundamentally a direct reflection of declining interest rates during an economic transition period, indicating that low-risk investors must adapt to a new normal of diminished returns.
Last week (June 22-28), approaching the quarter's end, mid-week liquidity showed some volatility. However, with supportive open market operations from the central bank in the latter half of the week, conditions eased, and bond yields resumed their downward trend.
Specifically, entering the half-year-end assessment window, tax payments, concentrated government bond issuance, and bank lending efforts jointly pressured short-term funding, causing the DR007 rate to spike temporarily to 1.54%, remaining above the 1.40% policy rate. The central bank signaled the deployment of overnight reverse repo tools in advance, continuing to increase injections to counter cross-quarter pressure. After mid-week, funding costs gradually retreated, and the surge in interbank certificate of deposit yields halted with a slight pullback.
The bond market displayed a pattern of short-end pressure and relatively stronger, volatile medium-to-long-end performance. Short-term bonds were impacted by elevated cross-quarter funding rates, with yields rising initially before falling. The long end continued to fluctuate, supported by weak underlying economic fundamentals and expectations of looser liquidity post the quarter-end period, with the 10-year government bond yield approaching previous lows again.
Regarding bond funds, Wind data shows that long-term bond funds, which had previously outperformed short-term funds, saw their advantage diminish last week, with an average return of 0.05% compared to 0.04% for short-term bond funds. However, top-performing products still held a significant edge. Among medium-to-long-term pure bond funds, Morgan Stanley Hengli A posted a weekly return of 1.99%, the best in its category. In contrast, the best-performing short-term bond fund, China Merchants Zhaocaitong A, returned only 0.096%.
From an industry perspective, liquidity conditions remain the core driver of the bond market's direction. Looking ahead, the implementation of supportive operations itself signals a commitment to liquidity provision. Furthermore, the net injection of 200 billion yuan via the Medium-term Lending Facility (MLF) in June also points to the central bank's unchanged supportive stance.
For the bond market, Minsheng Royal Fund analysis indicates that the easing of short-term funding pressure provides a direct positive catalyst. Coupled with a slower-than-expected pace of economic recovery in the second quarter, yields on some government bonds are expected to decline. Attention is also needed on the potential for further narrowing of the yield spread between different government bond maturities.
Beyond the equity market and pure bond funds, the situation for money market funds is also drawing significant attention. Once favored for their "capital preservation, high liquidity, and stable returns," more than 200 funds now have a 7-day annualized yield below 1%.
Wind statistics show that as of June 28, a total of 222 money market funds (across all share classes) have a 7-day annualized yield below 1%, placing yields at historically low levels.
Against the backdrop of widespread declines in money fund yields, numerous products are frequently triggering "fee reduction" clauses in their contracts. As yields fluctuate daily, the management fees for these funds are being repeatedly adjusted under the mechanisms stipulated in their agreements. Recently, several money funds have issued repeated announcements, with the core content being the dynamic adjustment of their management fees.
Taking Penghua Cash Increase Monetary Fund as an example, a fund announcement last week stated that when the estimated 7-day annualized yield calculated with a 0.85% management fee is less than or equal to twice the demand deposit rate, the fund manager will adjust the management fee to 0.30% to mitigate the risk of negative estimated net income per 10,000 fund units leading to settlement overdrafts at sales institutions. Only after such risks are eliminated can the fund manager resume charging the 0.85% management fee.
The fund company stated that due to the occurrence of the aforementioned conditions, the fund manager adjusted the fund's management fee to 0.30% on June 24. On June 25, the conditions were no longer met, and the management fee was restored to 0.85%.
Similar situations have occurred frequently recently. From a market perspective, low yields are likely to persist. Analysis points out that this phenomenon is essentially a direct reflection of declining interest rates during an economic transition period, compounded by new regulations limiting allocations to high-interest deposits. This is not a short-term fluctuation but an inevitable outcome of the deepening market-oriented interest rate reform. It signifies that low-risk investors need to adapt to an era of minimal returns, entering a new normal of the micro-profit era.
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