Summary of Key Points from the Conference Call Industry Overview - The discussion revolves around the Chinese fiscal system, which consists of four main accounts: General Public Budget (60% share), Government Funds (20% share), State Capital Operating Income, and Social Security Fund. [1][3] Core Insights and Arguments - The General Public Budget is primarily tax-based, with VAT, consumption tax, corporate income tax, and personal income tax contributing approximately 70% of total tax revenue. The reliance on indirect taxes has historically supported production development but may require reform in the current economic context. [1][4][5] - Government Funds mainly derive from land transfer income, which is utilized for real estate and infrastructure spending. [1][9][10] - The Social Security Fund faces a funding gap, relying on fiscal subsidies to cover deficits, which may widen due to an aging population, increasing fiscal pressure. [1][13] - The broad deficit rate in China is nearing historical highs, similar to Japan's situation over the past 30 years, indicating that rapid reductions in the deficit are unlikely without structural economic adjustments and inflation recovery. [1][16][18] - The fiscal policy's effectiveness has gained prominence due to the diminishing impact of monetary policy, particularly in light of changes in the real estate market and household leverage. [2] Important but Overlooked Content - The first account's expenditures are primarily directed towards social security, employment, education, and healthcare, with infrastructure spending decreasing. The deficit remains a concern, with revenues around 21 to 22 trillion yuan and expenditures approximately 27 trillion yuan. [8] - The second account, Government Funds, is heavily reliant on land sales, which constitute about 80% of its income, indicating a significant dependency on real estate for local government financing. [9][10] - The third account, State Capital Operating Income, has seen an increase in profit remittance from state-owned enterprises, with the remittance ratio reaching 50% in 2023. [11] - The fourth account, which includes social insurance, reported a deficit of about 2 trillion yuan in 2023, highlighting the challenges posed by demographic changes. [12][13] - The overall leverage ratio in China is relatively low compared to the US and Japan, suggesting potential for increased leverage, but structural reforms are necessary to ensure effective fund utilization and mitigate future deleveraging pressures. [19] Future Outlook - The fiscal policy is expected to have a significant impact on macroeconomic data in the first half of 2025, with a projected issuance of 14 trillion yuan in government bonds, an increase of 4 trillion yuan year-on-year. However, a reduction in issuance is anticipated in the second half, which may lead to a decline in related economic indicators. [21] - The third quarter will focus on the implementation of policy financial tools, with an expected scale of 300 to 500 billion yuan, and the fourth quarter may see new fiscal measures to stabilize market expectations and improve the economic fundamentals. [21]

Report Industry Investment Rating The document does not mention the industry investment rating. Core Viewpoints of the Report - In the second quarter, the stock and bond markets both performed well, boosting the expansion of the fund industry. Although bond funds face certain redemption pressure in the short term, the current internal economic momentum is weak, the logic of asset shortage continues, and the monetary policy guides sufficient liquidity. There is no pressure for a trend adjustment in the bond market. It is expected that the scale of bond funds will continue to increase steadily in the third quarter, and the scale increase of equity - containing products may exceed that of the second quarter [6]. - The share and net asset value of the entire market's funds increased in the second quarter. The scale of bond funds increased significantly. In terms of positions, the overall allocation ratio of the entire market's funds to bonds and stocks decreased, while the allocation ratio of cash increased significantly. Among them, the bond allocation mainly showed an increase in the allocation of treasury bonds, financial bonds, and credit bonds, and a decrease in the allocation of policy - financial bonds and inter - bank certificates of deposit [6]. - The performance of equity - containing products rebounded more. Among them, the performance of long - term bonds was better than that of short - term bonds, and the performance of hybrid second - tier bond funds was better than that of hybrid first - tier bond funds. Although the performance of hybrid funds was good, the scale declined. The main reasons are that the return gap between hybrid funds and second - tier bond funds is not obvious, and the risk level is higher; and the return of hybrid funds is lower than that of stock - type funds, and the recovery of risk appetite drives the scale of stock - type funds to rise, thus suppressing the hybrid funds [7]. Summary According to the Directory 1. Fund Total Scale Rises, Bond Allocation Scale Increases - **1.1 Fund Market Scale: Fund Shares and Net Asset Value Both Increase** - As of the end of the second quarter of 2025, there were approximately 1.29 trillion funds in total, with a market share of about 30.90 trillion shares and a net asset value of about 33.72 trillion yuan. Compared with the end of the first quarter of 2025, the number of various funds increased by 2.44%, the market share increased by 5.14%, and the net asset value increased by 6.68% [21]. - The net asset value of hybrid funds slightly decreased, while that of other types of funds increased. The net asset value of bond - type funds increased significantly. The total share of bond funds in the second quarter of 2025 was 9.60 trillion shares, a 6.27% increase from the end of the first quarter of 2025; the net asset value of bond - type funds was about 10.91 trillion yuan, an 8.54% increase from the end of the first quarter of 2025 [25][32]. - The outstanding shares of pure - bond funds and hybrid bond funds increased. The new - issue shares of actively managed and passively managed bond funds both increased slightly quarter - on - quarter but decreased significantly year - on - year [36][45]. - **1.2 Fund Asset Allocation: Bond Allocation Ratio Decreases Slightly, Cash Allocation Ratio Increases** - As of the end of the second quarter of 2025, the total asset value of funds increased by 8.42% compared with the end of the first quarter of 2025. The market value of stocks held increased by 4.09% quarter - on - quarter, the market value of bonds held increased by 7.69% quarter - on - quarter, and the market value of cash held increased significantly by 32.30% quarter - on - quarter. The reason for the increase in cash allocation by funds is mainly due to the increase in the cash allocation ratio of money market funds [53]. - The proportion of funds held in stocks, bonds, and other assets decreased, while the proportion of cash held increased. At the end of the second quarter of 2025, the proportions of stocks, bonds, cash, and other assets were 19.64%, 57.80%, 12.88%, and 9.15% respectively, among which the proportion of bond - holding assets decreased by 0.39 pct quarter - on - quarter [53]. - **1.3 Fund Bond - Holding Analysis: The Allocation of Financial Bonds Increased the Most Quarter - on - Quarter** - As of the end of the second quarter of 2025, the total value of bonds held by all funds was about 21.21 trillion yuan, a 7.69% increase from the end of the first quarter of 2025. Among them, interest - rate bonds, financial bonds, credit bonds, inter - bank certificates of deposit, and other bonds increased by 7.71%, 12.82%, 8.96%, 5.33%, and 5.78% respectively quarter - on - quarter [55][56]. - The proportion of inter - bank certificates of deposit held by funds decreased the most. In the bond positions of funds at the end of the second quarter of 2025, the allocation ratios of interest - rate bonds, financial bonds, and credit bonds increased by 0.01 pct, 0.59 pct, and 0.23 pct respectively quarter - on - quarter, while the allocation ratios of inter - bank certificates of deposit and other bonds decreased by 0.78 pct and 0.05 pct respectively quarter - on - quarter [56]. 2. Bond Fund Bond - Holding Analysis - **2.1 All Bond Funds: The Total Bond - Holding Scale Increases, the Allocation Proportion of Treasury Bonds Increases, and the Allocation Proportion of Policy - Financial Bonds Decreases** - As of the end of the second quarter of 2025, the total value of bonds held by bond - type funds was about 12.5207 trillion yuan, a 10.01% increase from the end of the first quarter of 2025. Among them, the market value of interest - rate bonds, financial bonds, credit bonds, inter - bank certificates of deposit, and other bonds increased by 405.9 billion yuan, 292.5 billion yuan, 380.6 billion yuan, 28.2 billion yuan, and 32.4 billion yuan respectively, with quarter - on - quarter growth rates of 7.96%, 13.05%, 11.87%, 8.85%, and 6.29% respectively [61][65]. - The allocation ratios of interest - rate bonds, inter - bank certificates of deposit, and other bonds decreased. The market value of treasury bonds and policy - bank bonds held by all bond funds accounted for 6.46% and 37.52% of the bond investment market value respectively, with quarter - on - quarter changes of 1.29 pct and - 2.13 pct respectively. The allocation ratios of enterprise bonds and short - term financing bills increased, while the allocation ratio of medium - term notes decreased [65][67]. - **2.2 Medium - and Long - Term Pure - Bond Funds: In Terms of Allocation Proportion, Reduce the Allocation of Policy - Financial Bonds and Increase the Allocation of Treasury Bonds** - As of the end of the second quarter of 2025, the total value of bonds held by medium - and long - term pure - bond funds was about 7.7616 trillion yuan, a 5.38% increase from the end of the first quarter of 2025. Among them, interest - rate bonds, financial bonds, credit bonds, inter - bank certificates of deposit, and other bonds changed by 4.47%, 6.50%, 5.86%, 0.45%, and 11.96% respectively quarter - on - quarter [71]. - In the second quarter, the allocation ratios of financial bonds and local government bonds in medium - and long - term bond funds increased the most, while the allocation ratio of interest - rate bonds decreased significantly. The market value of treasury bonds and policy - bank bonds held by medium - and long - term pure - bond funds accounted for 6.74% and 42.63% of the bond investment market value respectively, with quarter - on - quarter changes of 1.33 pct and - 1.76 pct respectively. The allocation ratios of enterprise bonds and short - term financing bills decreased, while the allocation ratio of medium - term notes increased [71][74]. - **2.3 Short - Term Pure - Bond Funds: In Terms of Allocation Proportion, Reduce the Allocation of Non - Financial Credit Bonds and Increase the Allocation of Financial Bonds** - As of the end of the second quarter of 2025, the total value of bonds held by short - term pure - bond funds was about 128.05 billion yuan, a 21.29% increase from the end of the first quarter of 2025. Among them, interest - rate bonds, financial bonds, credit bonds, inter - bank certificates of deposit, and other bonds increased by 28.73%, 52.18%, 13.26%, 13.10%, and 27.17% respectively quarter - on - quarter [79]. - Compared with the first quarter of 2025, short - term pure - bond funds reduced the allocation ratios of credit bonds and inter - bank certificates of deposit and increased the allocation ratios of interest - rate bonds, financial bonds, and other bonds. The market value of treasury bonds and policy - bank bonds held by short - term pure - bond funds accounted for 2.02% and 11.70% of the bond investment market value respectively, with quarter - on - quarter changes of 0.62 pct and 0.17 pct respectively. The allocation ratios of enterprise bonds, short - term financing bills, and medium - term notes decreased [79][81][82]. - **2.4 Hybrid First - Tier Bond Funds: Increase the Allocation of Cash and Bonds, Mainly Increase the Allocation of Interest - Rate Bonds and Financial Bonds** - At the end of the second quarter of 2025, the total asset value of hybrid first - tier bond funds was about 99.45 billion yuan, a 14.55% increase from the end of the first quarter of 2025. Among them, the market values of stocks, bonds, cash, and other assets changed by 1.85%, 15.00%, 17.19%, and - 3.39% respectively quarter - on - quarter [85]. - As of the end of the second quarter of 2025, the total value of bonds held by hybrid first - tier bond funds was about 96.11 billion yuan, a 15.00% increase from the end of the first quarter of 2025. Among them, interest - rate bonds, financial bonds, credit bonds, inter - bank certificates of deposit, and other bonds changed by 25.48%, 30.68%, 4.17%, 23.63%, and 10.04% respectively quarter - on - quarter. The allocation ratios of interest - rate bonds and financial bonds increased, while the allocation ratio of credit bonds decreased significantly [85]. - In terms of proportion, hybrid first - tier bond funds significantly increased the allocation of treasury bonds and reduced the allocation of various non - financial credit bonds in the second quarter [88]. - **2.5 Hybrid Second - Tier Bond Funds: Increase the Allocation of Cash and Bonds, Mainly Increase the Allocation of Interest - Rate Bonds** - At the end of the second quarter of 2025, the total asset value of hybrid second - tier bond funds was about 94.03 billion yuan, a 6.94% increase from the end of the first quarter of 2025. Among them, the market values of stocks, bonds, cash, and other assets changed by 2.66%, 7.34%, 30.18%, and - 6.07% respectively quarter - on - quarter [90]. - As of the end of the second quarter of 2025, the total value of bonds held by hybrid second - tier bond funds was about 79.61 billion yuan, a 7.34% increase from the end of the first quarter of 2025. Among them, interest - rate bonds, financial bonds, credit bonds, inter - bank certificates of deposit, and other bonds changed by 18.51%, 6.18%, 7.63%, - 16.54%, and - 3.92% respectively quarter - on - quarter. The allocation ratio of interest - rate bonds increased, while the allocation ratios of other types of bonds decreased [91]. - In the second quarter, the allocation ratio of treasury bonds in hybrid second - tier bond funds increased, while the allocation ratio of policy - bank bonds decreased. The allocation ratio of medium - term notes increased, while the allocation ratios of enterprise bonds and short - term financing bills decreased [95]. 3. Analysis of the Structure of Fund Heavy - Positioned Bonds: The Proportion of Treasury Bond Positions Continues to Rise - In the second quarter, bond funds mainly increased the allocation of treasury bonds and reduced the allocation of policy - financial bonds. In the heavy - positioned interest - rate bonds of bond - type funds in the second quarter of 2025, the proportions of treasury bonds, local government bonds, and policy - bank bonds were 11.62%, 1.34%, and 87.04% respectively. Compared with the first quarter of 2025, the allocation ratio of treasury bonds increased by 2.70 pct, the allocation ratio of local government bonds decreased by 0.12 pct, and the allocation ratio of policy - bank bonds decreased by 2.58 pct [97]. - Bond funds increased the allocation ratio of AAA - rated industrial bonds and reduced the allocation ratios of AA +, AA, and below - AA - rated industrial bonds. In the heavy - positioned industrial bonds of bond - type funds in the second quarter of 2025, the proportions of AAA, AA +, AA, and below - AA industrial bonds were 94.81%, 4.59%, 0.60%, and 0.00% respectively [101]. - Bond funds increased the allocation ratios of AAA - and AA - rated urban investment bonds and reduced the allocation ratio of AA + - rated urban investment bonds. In the heavy - positioned urban investment bonds of bond - type funds in the second quarter of 2025, the proportions of AAA, AA +, AA, and below - AA urban investment bonds were 61.30%, 29.45%, 8.91%, and 0.34% respectively [102]. - In terms of regions, at the end of the second quarter of 2025, the heavy - positioned urban investment bonds of bond - type funds were still mainly from Zhejiang, Shandong, and Jiangsu. Notably, in the second quarter, the position - holding ratios of bond funds in regions such as Guangdong and Guangxi Zhuang Autonomous Region increased quarter - on - quarter, while the position - holding ratios in regions such as Hunan and Henan decreased quarter - on - quarter [105][106]. 4. Analysis of Fund Leverage and Duration: Both Leverage Ratio and Duration Increase - In the second quarter, the leverage ratios of medium - and long - term pure - bond funds, first - tier bond funds, and second - tier bond funds increased. The leverage ratios of medium - and long - term pure - bond funds, first - tier bond funds, and second - tier bond funds were 120.20%, 116.61%, and 113.83% respectively, increasing by 2.58 pct, 3.29 pct, and 1.73 pct respectively compared with the first quarter of 2025 [110]. - In the second quarter, the durations of medium - and long - term pure - bond funds, first - tier bond funds, and second - tier bond funds increased. The durations of medium - and long - term pure - bond funds, first - tier bond funds, and second - tier bond funds were 3.76 years, 4.07 years, and 3.83 years respectively, increasing by 0.79 years, 1.19 years, and 0.93 years respectively compared with the first quarter of 2025 [110]. 5. Fund Performance Analysis: The Performance of Equity - Containing Products Rebounded More - In the second quarter of 2025, the median quarterly returns of various funds were ranked as follows: stock - type funds (1.59%) > hybrid funds (1.18%) > second - tier bond funds (1.15%) > ChinaBond Treasury Bond Total Full - Price Index (1.11%) > first - tier bond funds (1.08%) > medium - and long - term pure - bond funds (0.99%) > short - term pure - bond funds (0.67%) > ChinaBond CDB Bond Total Full - Price Index (0.41%) > money - market funds (0.33%) [113]. - Although the performance of hybrid funds was good, the scale declined. The main reasons are that the return gap between hybrid funds and second - tier bond funds is not obvious, and the risk level is higher; and the return of hybrid funds is lower than that of stock - type funds, and the recovery of risk appetite drives the scale of stock - type funds to rise, thus suppressing the hybrid funds [113].

Group 1 - The core issue in the current market is whether the Federal Reserve will lower interest rates, as the end of U.S. exceptionalism and tariff negotiations have been fully priced in [5][8][14] - The economic growth in the U.S. is facing serious challenges, as government leverage has ended, leaving private sectors to determine their own leverage based on market interest rates and long-term asset return expectations [8][12] - Recent consumer spending data showed a significant decline, with May's consumer spending down 0.28% month-on-month, marking the worst performance in over a year [17][18][19] Group 2 - The upcoming tariff negotiations are critical, with deadlines approaching for agreements with various countries, including the U.S.-Europe talks by July 9 and U.S.-China discussions by August 11 [28][29] - The market has already priced in expectations for a rate cut in September, which may limit the potential for further market gains unless additional positive factors emerge [28][30] - The Federal Reserve is in a difficult position, as not lowering rates may hinder corporate and consumer leverage, while lowering rates could exacerbate inflation if not managed properly [26]

Report Overview - Report Title: "Fixed Income Weekly: Bond Market Investors Shift from Bullish Sentiment to Active Buying - Weekly Report on Bond Market Institutional Behavior (Week 3 of June)" [1] - Report Date: June 15, 2025 [2] - Chief Analyst: Yan Ziqi [3] - Research Assistant: Hong Ziyan [4] Industry Investment Rating - Not provided in the report. Core Views - The bond market is experiencing a bullish and active buying trend due to three marginal changes: optimistic market sentiment, increased long - term positions and leverage by institutions, and favorable fundamental data. However, there are also three points to note, including low return odds, risks associated with extending duration, and the need to monitor signals of loose monetary policy [6]. Summary by Directory 1. This Week's Institutional Behavior Review - **Three Marginal Changes in the Bond Market** - Bond market sentiment is approaching the most optimistic level of the year [14]. - Institutions are not only bullish but also actively buying. Near the end of the half - year, the duration of medium - and long - term bond funds has increased, and funds are buying long - term bonds and increasing their purchases of medium - term notes [14]. - The overall leverage ratio of the bond market is rising and has exceeded last year's level. The liquidity in June is not tight, which has spurred institutions to increase leverage [6]. - **Three Points to Note** - In the environment of extending duration and increasing leverage, the return odds are low. The current yield curve is extremely flat, and the space for long - term bonds to reach historical lows is small [6]. - Extending duration presents both opportunities and risks. Although it is a way for institutions to seek higher returns, historical data shows that the bond market in June is often volatile [7]. - Large banks' preference for short - term bonds has become a trend. Attention should be paid to subsequent signals of loose monetary policy [16]. 1.1 Yield Curve - **Treasury Bonds**: Yields generally declined. The 1Y, 3Y, 5Y, 7Y, 10Y yields declined by 1bp, and the 15Y and 30Y yields declined by 3bp. The 1Y yield dropped to the 8% quantile, while 3Y, 5Y, 7Y, 10Y, 15Y, and 30Y dropped to the 2% quantile [17]. - **China Development Bank Bonds**: Short - term yields rose slightly, while long - term yields declined. The 15Y yield declined by 3bp, and the 30Y yield declined by 4bp. The 1Y, 3Y, 5Y, 7Y, and 10Y yields were at different quantiles [18]. 1.2 Term Spreads - **Treasury Bonds**: The spreads showed a divergent trend, with short - term spreads widening and long - term spreads narrowing. The 1Y - DR001 spread increased by 1bp, and the 1Y - DR007 spread's inversion deepened by about 1bp [19]. - **China Development Bank Bonds**: The spread inversion eased, and long - term spreads narrowed. The 1Y - DR007 spread's inversion eased by 3bp [20]. 2. Bond Market Leverage and Liquidity - **Leverage Ratio**: It rose to 107.51%. From June 9 to June 13, 2025, the leverage ratio fluctuated upward. As of June 13, it increased by 0.37 percentage points compared to last Friday [23]. - **Average Daily Turnover of Pledged Repurchase**: The average daily turnover this week was 7.9 trillion yuan, with an average overnight proportion of 89.39%. The average daily turnover increased compared to last week [30]. - **Liquidity**: Bank lending showed a fluctuating upward trend. DR007 fluctuated downward, while R007 fluctuated upward [35]. 3. Duration of Medium - and Long - Term Bond Funds - **Median Duration**: It rose to 2.78 years (ex - leverage) and 2.96 years (including leverage). As of June 13, the ex - leverage median duration increased by 0.02 years compared to last Friday [45]. - **Duration by Bond Fund Type**: The median duration of interest - rate bond funds (including leverage) remained at 3.67 years, while the median duration of credit bond funds (including leverage) rose to 2.73 years [48]. 4. Comparison of Generic Strategies - **Sino - US Yield Spread**: The overall inversion has eased. The inversion of 1Y, 2Y, 3Y, 5Y, 7Y, 10Y, and 30Y has decreased by 4bp, 7bp, 11bp, 11bp, 10bp, 9bp, and 4bp respectively [52]. - **Implied Tax Rate**: It has generally widened. The spreads between China Development Bank bonds and treasury bonds for 1Y, 3Y, 5Y, 7Y, and 10Y have widened, while the 15Y spread changed slightly and the 30Y spread narrowed [53]. 5. Changes in Bond Lending Balances - On June 13, the lending concentration of active 10Y treasury bonds, the second - most active 10Y China Development Bank bonds, active 10Y China Development Bank bonds, and active 30Y treasury bonds showed an upward trend, while the concentration of the second - most active 10Y treasury bonds declined. All institutions showed an upward trend [58].