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Original title: Wells Fargo Fund Zhu Mengna: A Rational View of Bond Market Confidence Volatility Needs to Be Reshaped
■ Wells Fargo Fund column
Over the past two weeks, the domestic bond market has experienced significant fluctuations. The factors that triggered this round of bond market adjustment came mainly from the credit bond market. Due to the default of some credit bond issuers, local panic has spread. The level of yield on debt securities rose rapidly by 30-40 basis points over a short period of time, the shape of the curve was further flattened and the net worth of bond funds also received a considerable degree of retracement.
For the domestic credit bond market with a volume of over 38 trillion yuan, the occurrence of credit events has its own contingency and inevitability. Historical experience shows that there is a correlation between the credit cycle and the business cycle, and the transmission and exposure of credit risk has a time frame with respect to the business cycle, which tests the ability of bond issuers to travel through the business cycle. Since the actual default of the domestic bond market in 2014, investors are no stranger to credit risk. In the mature bond market, the occurrence of insolvency events is a normal phenomenon and the risks assumed by investors should be compatible with the expected returns. Indeed, the domestic bond market has already experienced several cycles of credit cycle contraction. What are the similarities and differences between recent adjustments in the credit bond market and changes in investor mentality?
First of all, from the point of view of credit analysis, the quantitative credit analysis and the qualitative credit analysis often have the same importance. Rapid changes in the business cycle and the lagging nature of financial indicators make it impossible for investors to grasp the true changes in a company’s solvency through quantitative analysis. At this time, the willingness to repay debt has an important supportive significance for corporate credit fundamentals. Recent credit risk events have occurred precisely due to the lack of solvency of the issuers and the vague desire to coordinate and support external resources, which have affected investor confidence. Secondly, there is insufficient spread protection for credit bonds with medium credit ratings. Since 2018, due to changes in the structure of market supply and demand and the improvement in investor risk appetite, credit spreads have continued to fluctuate and decline. At the end of October, AA + and AA 3-year credit spreads were below the fourth quantile in history since 2014, and the credit spreads of low-qualifying bonds were unprotected. When the market is hit by a credit event, investors’ requirements for liquidity clearing and risk clearing for credit obligations increase, resulting in rapid expansion of credit spreads.
Historically, the outbreak of short-term credit events has a negative effect on investors’ risk appetite and liquidity preferences and the restoration of market confidence after the impact cannot be completed overnight. tomorrow. In the medium to long term, an orderly market-based liquidation process is a necessary condition for a healthy and sustainable development of the debt securities market. As an important direct financing method for businesses, credit bonds have always played an important financial function. As a market participant, we hope to continuously improve our investment and research capabilities by summarizing experiences and lessons and providing clients with long-term stable returns.
(The author of this article is Mengna Zhu, Manager of Wells Fargo Pure Bond and Wells Fargo Investment Grade Credit Bond Fund)
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