Core Viewpoint - The Ministry of Finance and the State Taxation Administration announced the restoration of VAT on interest income from newly issued government bonds, local government bonds, and financial bonds starting from August 8, 2025, while existing bonds will remain exempt until maturity, leading to significant market reactions and shifts in investment strategies [1][2][3]. Market Reaction - The announcement caused an immediate spike in bond yields due to increased holding costs for new bonds, followed by a rapid decline in yields as institutional investors rushed to acquire existing bonds benefiting from the tax exemption [1][2]. - The volatility in the bond market reflects a quick shift in investor sentiment, with many traders expressing concerns over the rapid changes in market dynamics [1]. Investment Strategy Shifts - Institutions are expected to favor existing bonds over new issues due to the tax advantages, potentially leading to a widening of the yield spread between old and new bonds and a surge in demand for existing bonds [2][4]. - The tax policy change is seen as providing more diverse strategic options for investors, with the bond market's performance likely influenced by fundamental economic conditions and monetary policy [2][4]. Impact on Credit Bonds and Other Assets - The restoration of VAT on interest income from government bonds diminishes their tax advantage over credit bonds, which may lead to a narrowing of credit spreads as the tax premium on credit bonds decreases [3][7]. - As the attractiveness of government bonds declines, some funds may shift towards credit bonds, equities, and other asset classes like REITs, indicating a potential reallocation of capital within the market [7][8]. Fund Management Adjustments - Fund companies are adjusting redemption limits for bond funds in response to the new tax policy, anticipating changes in investor behavior and market volatility [4][6]. - The overall impact on public funds is expected to be limited, with the potential for stable returns in bond and money market funds despite short-term fluctuations [4][6]. Long-term Outlook - The long-term effects of the tax policy change on the bond market are considered moderate, with expectations that the overall configuration of bond investments will remain stable, particularly for institutional investors who continue to view government bonds as essential components of their portfolios [7][8].

Group 1 - The Chinese bond market is becoming a key allocation direction for foreign public funds due to ongoing policy support and economic structural adjustments [1][3] - The current macroeconomic environment remains weak, with a moderately loose monetary policy and a reasonable liquidity level, enhancing the medium to long-term allocation value of bond assets [2][3] - Bond assets are expected to provide stable returns and act as a "ballast" during equity market fluctuations, especially in times of increased economic uncertainty [1][4] Group 2 - The liquidity environment continues to be supportive, with the central bank maintaining a moderately loose monetary policy, which is crucial for the bond market [2][3] - The bond market is expected to see a low interest rate environment for an extended period, providing opportunities for investment [2][3] - The bond market's "stabilizer" function is increasingly highlighted amid multiple economic pressures, with bonds showing lower volatility compared to equities over the past decade [4][5] Group 3 - Investment strategies in the bond market are becoming more refined, with a focus on both credit bonds and interest rate bonds, requiring dynamic management based on market conditions [5][6] - Credit bond strategies should focus on high-quality assets and appropriate allocation of bond grades and liquidity to achieve capital gains alongside coupon income [6] - The government bond net issuance is projected to be significant in the second and third quarters, providing ample supply of interest rate bonds to the market [6]