Mutual funds that hold bonds are selling like hot cakes in China as investors bet the central bank will cut interest rates further to aid the struggling economy.
More than 50 bond-focused mutual funds were launched in November, raising 105 billion yuan ($14.71 billion) in total -- the biggest monthly fundraising this year, according to data from fund consultancy Z-Ben Advisors.
Money has also been gushing into existing bond products, forcing mutual funds to limit subscriptions to more than 100 such bond fund products over the past month.
Despite a recent pause in the bond run, "it's still good timing" to buy bonds, said Alvin Cheng, portfolio manager at Fidelity International's China unit, which raised 5 billion yuan for a bond fund last month.
China needs an accommodative monetary policy to support its arduous economic restructuring, so "interest rates will likely trend lower", he said. That bodes well for bonds, whose prices move inversely with rates.
Expectations of a robust post-COVID recovery in China have been dashed by a deepening real estate crisis that is weighing heavily on consumer confidence, local government debt woes, weak exports and geopolitical tensions. Despite a host of policy measures and monetary easing, data shows the economy remains wobbly.
Bonds have been volatile as Beijing rolled out spending plans while keeping rates from falling too much, with an eye on supporting the weak yuan. Ten-year yields are down roughly 35 basis points this year.
Analysts expect such constraints to be removed next year as U.S. rates peak and are possibly cut, weakening the dollar. Standard Chartered Bank forecasts the People's Bank of China will cut both policy rates and banks' reserve requirements in the first half of 2024.
That prospect has spurred frenetic buying of fixed-income products.
Chinese bond mutual funds have delivered a return of 2.9% so far this year on average, compared with a loss of 12% for equity funds.
Bonds-focused hedge funds outperformed other strategies, delivering a return of 7% for investors, according to Shanghai Securities Co. data.
Schroders Plc's China mutual fund subsidiary said it will launch a bond-focused product in early December to help investors "seize market opportunities."
Zhang Hezhang, a bond fund manager at TruValue Asset Management, said during a roadshow that "it's rewarding to buy bond funds now" as stocks are volatile and returns from bank deposits have become razor-thin.
China is no longer reliant on high economic growth driven by property and infrastructure, and its painful economic restructuring "requires lower risk-free interest rates, which would push up bond prices," he said.
($1 = 7.1397 Chinese yuan)
(Reporting by Samuel Shen and Summer Zhen Editing by Vidya Ranganathan and Kim Coghill)