The economic landscape is often characterized by periods of uncertainty, especially during times of a sluggish economy or a volatile stock marketInvestors, in such scenarios, tend to gravitate towards assets that promise relative certainty and stability—this year has recognized a notable trend with bond funds emerging as a preferred choice, resulting in enriched pockets for manyThe statistics speak volumes; as of April 23, 2023, a vast array of 3,012 medium to long-term pure bond funds reported an impressive average yield of 1.72%, which translates to an annualized return of approximately 5.63%. Incredibly, only 14 of these funds recorded negative returns, establishing an impressive win rate of over 99.53%. In particular, 119 of these funds exceeded a 10% annualized return, a testament to the market's favorable conditions for bond investment this year.

On the other side, the short-term pure bond funds, totaling 792, exhibited an average yield of 1.29% and an annualized return of 4.20%. Even within this category, only four funds suffered from negative returns, maintaining a win rate above 99.49%. Furthermore, five of these short-term bond funds achieved annualized returns surpassing 10%. However, as the adage goes, “The flower doesn’t bloom for a hundred days,” indicating that even in favorable markets, challenges can arise unexpectedly

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A pivotal moment arrived on April 24, when the phenomenon of a “bull market in bonds” abruptly ceased, leaving many investors who thrived on daily gain reports—lovingly dubbed “egg reports”—disheartened.

To illustrate, when a bond fund increases in value by 0.12% in a day, it is seen as earning "12 eggs." However, following the astonishing performance, there was a swift declineBetween April 24 and April 26, a staggering 2,646 out of 3,024 medium to long-term bond funds saw a drop in their net asset valuesThe situation was even bleaker for short-term bond funds, with 732 out of 789 experiencing similar declinesNotably, a shocking ten funds (counting different share classes) plummeted by more than 1% over just three trading daysThis abrupt reaction left many investors deliberating whether to steer clear of the market or seize the opportunity to increase their holdings.

Before delving into strategic responses, it is essential to understand the two primary sources of income for pure bond funds: income derived from interest-rate bonds and that from credit bonds

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Let’s start with interest-rate bondsTake, for instance, the ten-year government bond futures index, which witnessed a steady climb earlier this year, only to face a corrective wave recentlyOn April 24, it dropped by 0.36%, followed by a minor decline of 0.03% on April 25 and 0.26% on April 26. On April 29, the index hit a low point of 0.61% before closing down by 0.41%. Most likely, as the net asset values are announced that evening, many pure bond funds will report negative returns.

This decline is substantial: according to the China Bond 10-Year Treasury Wealth Index, a promising year-to-date increase of 3.08% as of April 23 saw a significant retreat of -0.68% in just four trading daysWhy did prices for interest-rate bonds experience such a dramatic fall? Prior to this downtrend, Central Bank officials alerted the market to focus on long-term yields and acknowledge the market's risks

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This warning was promptly followed by a substantial rise in the yield of 30-year treasury bonds, including the actively traded “Coupon Treasury Bond 23,” which saw its yield spike by over three basis points within a short spanGiven the inverse relationship between bond prices and yields, this escalated yield caused the prices of interest-rate bonds to decrease, with longer-dated securities being particularly affected.

Next, it's essential to analyze credit bondsThroughout this bullish period for bonds, both the yields and spreads for credit bonds have steadily decreased to historic lows, making it increasingly difficult to achieve substantial investment returnsConsequently, numerous existing credit bonds have seen their coupon rates revised downward during their exercise periodsSome businesses, unable to bear the hefty interest payments, even face the risk of default, leading to a few pure bond funds inadvertently facing "credit disasters."

The declines in both interest-rate and credit bond yields have been primarily responsible for the recent drop in pure bond funds

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Furthermore, the pullback in medium to long-term bonds has been more pronounced compared to short-term fundsThis scenario underscores that while bond funds generally offer reliable long-term returns, they also necessitate timely investment strategiesIndicators such as government bond yields, the prevailing landscape for credit bonds, and the skillset of fund managers in selecting bonds are all critical aspects to consider when deciding when to invest.

Despite the current turbulence, there’s no need for undue panicIn the long term, the returns from interest-rate bonds remain relatively steadyAdditionally, certain fund managers possess the expertise to choose credit bonds effectively, allowing for a balanced approach that can address both long-term returns and short-term market fluctuationsAmong the various pure bond funds available, several have demonstrated significant performance over the past year (ending April 26, 2024) and have successfully controlled their pullbacks amid recent bond market volatility, providing flexible trading opportunities.

For instance, Xinhua Anju Pure Bond A (017214) is a long-term fund with a 9.36% yield over the past year, experiencing a negligible dip of 0.04% recently

Fund Manager Lv Zhizhu has been at the helm since April 26, 2023, focusing on researching varying regional debt reduction policies while seeking opportunities among undervalued platform company bonds benefiting from these policiesAnother fund, Wanjia Xinrong Pure Bond A (015925), has achieved a yearly return of 6.05%, with a slight uptick of 0.01% recentlyUnder Manager Zhou Hui’s guidance since February 28, 2023, the fund adopts a barbell holding structure that emphasizes low credit risk high-grade bonds while engaging in strategic movements with long-term interest-rate bonds.

Ping An Huize Pure Bond (004825), another long-term bond type, showcases a 4.16% yield with a recent marginal uptick of 0.01%. Managed by Tang Yu since January 26, 2024, this fund primarily allocates investments to interest-rate bonds while capitalizing on trading strategies to enhance returnsSimilarly, Hang Seng Qianhai Hengyang Pure Bond A (007941) has managed a 4.10% yield, facing a minuscule downturn of 0.03%. Manager Li Weikang has maintained the fund since December 4, 2019, expressing confidence in the underlying strength of government bonds despite recent market fluctuations.

Lastly, short-term funds like Huazhen Tianxin Medium Short Bond A (040045) demonstrate a 2.90% annual yield, remaining stable recently