China's bond market experienced unexpected fluctuations, with the net value of most wealth management products significantly retreating and some wealth management products losing money, which caused widespread concern in the market.

Recently, China Financial Forty Forum (CF4) held an internal seminar on "Causes, Effects and Countermeasures of Recent Fluctuations in the Bond Market". Experts attending the meeting generally believe that compared with the past few large fluctuations in the bond market, the fluctuation range of this round of bond market is not large, but the market feedback it triggered did exceed expectations beforehand.

From a macro perspective, there are three main reasons for the sharp fluctuations in this round of bond market:

First, there is an inflection point in overseas inflation, and there are signs that major assets around the world are beginning to switch. In recent months, macro data such as real estate and consumption in the United States have weakened, indicating that the US economy has begun to show a downward trend. The latest inflation data in the United States released on November 1th was also regarded as a faint inflation turning point by most institutional investors in the market. Since then, the US dollar index has fallen, and overseas and domestic stock markets have rebounded, all of which have the characteristics of large-scale assets. There are signs of a shift in global assets.

Secondly, the domestic market liquidity has ended in a relatively affluent state and entered a more reasonable and neutral range. In the first three quarters of 222, the liquidity of China's interbank market was generally loose, and the 7-day pledged repo rate (DR7) of deposit-taking institutions in the interbank market continued to be lower than the policy interest rate represented by the 7-day reverse repurchase. Two reasons led to the overall ample market liquidity in the first three quarters. On the one hand, policy factors such as the profit paid by the central bank, the increase in fiscal expenditure, and the continuous exertion of structural policies have provided ample liquidity foundation for the market. On the other hand, the loan demand of market players has been weak, and the residents' willingness to expand their liabilities is not strong, and some funds are accumulated in the financial system.

since October, there have been some changes in all the above factors. When the spread between China and the United States increases, foreign capital flows out of the bond market, and the market liquidity begins to stabilize, and the short-term debt cost of financial institutions has increased, but the asset structure of financial institutions has not been adjusted accordingly. In this case, bond prices will be more sensitive to shocks, and the balance sheets of financial institutions will be more affected.

finally, the optimization and adjustment of epidemic prevention policies and the introduction of financial support real estate policies have significantly improved the expectations of domestic market participants for the future economy.

at the micro level, this round of sharp fluctuations in the bond market can be divided into four stages.

The first stage is the warm-up stage. During the period from October 1th to November 1th, the liquidity of the interbank market was tight, and interest rates began to rise gradually.

The second stage is a stage of rapid evolution, and the simultaneous appearance of three macro factors at home and abroad has led to the centralized adjustment of domestic investors' expectations for economic recovery.

The third stage is the negative feedback stage. As the interest rate rises, the net value of asset management products will be adjusted back, and residents and some institutional investors will focus on redeeming products, forcing asset management institutions to sell assets further and causing interest rates to rise again, thus forming negative feedback. At this stage, market public opinion also played the role of amplifier, which aggravated the panic of the residential sector and strengthened the chain reaction of the market.

The fourth stage is relatively stable. After the bond market fluctuated greatly, the central bank made timely pre-adjustment and fine-adjustment, which effectively reduced the market panic. The net lending scale of big banks has returned to the level of late October, and the money fund has also changed from net selling to net buying.

The sharp fluctuation of this round of bond market reflects three structural problems

Most experts attending the meeting believe that the current bond market has passed the most panic stage, but the volatility will increase compared with the previous three quarters. At the same time, this round of bond market volatility has exposed some structural problems in China's bond market.

first, the hierarchy of China's bond market is not obvious enough, and the selectivity of asset management institutions is less. The hierarchy of bond market means that there are obvious differences in income and risk characteristics between different bonds, so asset management institutions can allocate assets according to their own risk and income preferences. A high-quality financial market must be a market with clear stratification. Only in this way can we accommodate more types of financial institutions and allocation strategies, and the market will be more inclusive and resilient. A prominent problem in China's bond market is that the difference of bond products is not strong. The trading interest rate range of existing bond products in the market is relatively narrow, mainly in the interest rate range of 2%-5%. The risk preferences of different market entities cannot be fully reflected in the market, which indirectly leads to the convergence of asset structure and allocation logic among different institutions.

second, the problem of short-term asset management products is still outstanding, and the source of funds in the bond market is relatively single. Among the existing asset management products of financial subsidiaries and Public Offering of Fund, the asset management products within half a year are still the mainstream, and the scale of closed asset management products is relatively small. This leads to little difference between related asset management products and money funds. This also means that the source of funds in China's bond market is relatively single, especially lacking the allocation demand and deep participation of long-term stable funds.

thirdly, the trading mechanism lacks diversity. At the stage of this round of sharp fluctuations in the bond market, financial institutions often sell interest rate bonds first when faced with liquidity constraints, which leads to a rapid rise in the interest rates of national debt and CDB. On this basis, if the liquidity requirements are still not met, some institutions will have to sell credit bonds. At present, the market maker system is not widely adopted in the credit bond market, and it lacks liquidity at the transaction level. Therefore, in order to sell credit bonds as soon as possible, some institutions must make a large discount, which is actually a high liquidity compensation.

fourthly, there is a common convergence feature in asset management institutions in China at present. In recent years, the behavior patterns of asset management institutions represented by bank wealth management subsidiaries are very similar, the risk preference of asset allocation tends to be low, and the asset portfolio tends to be standardized assets dominated by bonds. Among bond assets, credit bonds are widely sought after by institutions, including urban investment bonds and high-grade industrial bonds. This directly leads to the highly centralized position structure of institutions, and the allocation behavior itself will also compress the credit spread and cover up the real risk premium level. Therefore, once the market changes and the price mechanism triggers financial institutions to adjust their positions, it is easy for the bond market to "trample".

next, in order to better reduce the impact of abnormal market fluctuations on financial stability, the regulatory authorities should consider establishing a broader liquidity management mechanism in the bond market. Specifically:

First, try to avoid a sharp rise in interest rates in the short term. Keeping the bond market running smoothly is very important for maintaining China's financial stability. In particular, we should try our best to avoid the recurrence of institutional "stampede" and liquidity run caused by the sharp rise in interest rates in the short term.

second, the regulatory authorities should establish crisis handling mechanisms under different circumstances, and timely and effectively intervene in the initial stage of abnormal market fluctuations. These crisis management mechanisms include the monitoring and identification of abnormal fluctuations, the conditions and methods of liquidity delivery, and the release of policy signals that stabilize the expectations of market participants. Through the construction of such a mechanism, the regulatory agencies can stabilize abnormal market fluctuations from early to early, and avoid eventually evolving into a financial crisis.

thirdly, optimize the liquidity management mechanism in the secondary market. Continue to promote the bond market to establish a broader market maker system. Reform the framework of debt management and guide bond issuers to take the initiative to manage debt when bond prices fluctuate abnormally. Referring to the management experience of overseas mature bond markets, this paper explores the establishment of a financial stability fund in the bond market, and endows the financial stability fund with stability in a specific period of time.