Group 1: Report Title and Basic Information - Report title: Outlook for the Credit Bond Market from August to October 2025 [2] - Analysts: Huang Weiping, Yang Xuefang, Zhang Jinyuan [3] - Date: August 5, 2025 [3] Group 2: Core Viewpoints - In the short - term (within 1 month), credit spreads may still have room to compress, but in the next 1 - 3 months, spread compression faces resistance and potential adjustment risks are greater [4][6][32][70][71] - Credit strategy: moderately reduce duration and seize the profit - taking window [4][6] Group 3: 7 - month Review 3.1 Primary Market - In July 2025, the issuance of traditional credit bonds decreased slightly month - on - month, and net supply increased month - on - month. Industrial bond net financing decreased month - on - month but remained at a high level, and urban investment bond net financing turned positive. Bank perpetual and secondary capital (two - tier) bonds' issuance and net supply increased significantly month - on - month. Secondary capital bond issuance and net financing increased, while perpetual bond issuance and net financing decreased [13][16][32] 3.2 Secondary Market - In July, credit bond yields fluctuated upwards, and credit spreads were passively narrowed. Short - term yields decreased slightly, medium - and long - term yields mostly increased, and long - term yields increased more significantly. Credit spreads generally narrowed, with weak - quality medium - term notes and bank perpetual bonds performing better. In terms of credit spreads, ordinary credit bonds' spreads mostly narrowed, two - tier capital bonds' spreads mostly widened, and bank perpetual bonds' spreads mostly narrowed. The term spreads within 5 years generally widened, especially the 3 - 1 year term spread. In terms of holding - period yields, the capital gains of medium - and long - term credit bonds were negative, and the short - term holding - period yields remained positive [19][23][27][31][32] Group 4: 8 - 10 Month Outlook 4.1 Compression Phases of Credit Spreads - Phase 1 (May 1 - May 23): Overall catch - up of credit bonds under loose liquidity. Driven by the implementation of reserve requirement ratio and interest rate cuts, and the expectation of financial disintermediation and deposit transfer, except for some long - term secondary capital bonds, credit bonds generally rose, with yields and credit spreads declining [39][43] - Phase 2 (May 23 - July 18): A scramble for constituent bonds under the expansion of credit bond ETFs, further compressing credit spreads. Driven by continuous loose liquidity and the rapid expansion of credit bond ETFs, medium - and long - term credit bonds continued to catch up, and constituent bonds outperformed non - constituent bonds [48][52][58] 4.2 Characteristics of Credit Bond Market under Recent Adjustments - Credit bond yields had a pulse - type adjustment, but the widening of credit spreads was not obvious. Driven by the rapid rise of commodities and equity assets under the "anti - involution" background, along with tightened liquidity, the bond market had a pulse - type adjustment. The adjustment range of credit bond yields was mostly around 10BP, and the widening of credit spreads was mostly within 5BP. The credit spreads of long - term general credit bonds were even passively narrowing, and the spreads of constituent bonds and non - constituent bonds did not converge [61][65] 4.3 Market Outlook - Short - term (within 1 month): Credit spreads may still have room to compress. Market sentiment eases, redemption pressure eases, and credit bonds still have a positive carry environment and room for carry - trade and leveraging. The VAT recovery policy on interest income of treasury bonds, local bonds, and financial bonds may indirectly benefit general credit bonds [4][70] - Next 1 - 3 months: Spread compression faces resistance, and potential adjustment risks are greater. August - October may be a volatile period for the bond market, with the curve possibly becoming steeper. The difficulty of further loosening liquidity is increasing, and the probability of double - cuts (RRR and interest rate cuts) decreases. The incremental funds for credit bonds may be relatively limited, and their sustainability remains to be seen. The current credit spread protection space is thin, and the market trading structure is fragile. Credit bond ETFs may amplify market volatility [4][32][71] Group 5: Credit Strategies - Moderately reduce duration and seize the profit - taking window. For ultra - long - term credit bonds and credit bond ETF constituent bonds, it may be approaching the profit - taking window [4][6] - For financial bonds,建议 reduce the position and duration of two - tier bonds and pay attention to TLAC non - capital bonds with both offensive and defensive attributes [6] - For general credit bonds, be vigilant about constituent bonds and focus on urban investment bonds and inter - bank bonds. Pay attention to the investment opportunities in 1 - 3 - year AA + and above - grade inter - bank bonds and 1 - 3 - year AA/AA(2)/AA - grade urban investment bonds [6] - Pay attention to the investment opportunities brought by the expansion of the Southbound Bond Connect. The expansion may bring allocation opportunities, and the dim - sum bond market is one of the core expansion directions [6]

Group 1: Report Industry Investment Rating - No information provided in the given content Group 2: Core Viewpoints of the Report - Bond Southbound Connect is about to be expanded. In the situation of "asset shortage", the influx of non-bank funds into Chinese overseas bonds may increase the demand for Chinese overseas bond varieties to some extent. The report focuses on the overview of Bond Southbound Connect, the performance of Chinese overseas bonds in H1 2025, and the opportunities for Chinese overseas bonds in H2 2025 under the expansion of Southbound Connect [15] Group 3: Summary According to the Table of Contents 1. Bond Southbound Connect Overview - **Southbound Connect Expansion Policy Support**: In 2025, multiple meetings or events mentioned the expansion of Southbound Connect. Measures include extending settlement time, supporting multi-currency bond settlement, and expanding the scope of eligible domestic investors [15] - **Southbound Connect Concept and Constraints**: "Southbound Connect" allows domestic investors to invest in bonds traded in the Hong Kong bond market. The previous domestic investors were 41 bank - class financial institutions, QDII, and RQDII. The funds can only be used for bond investment, and there are restrictions on investment额度 and scope [20][28][33] - **Southbound Connect Full - Process Mechanism**: The trading method is Request for Quote (RFQ). It adopts a nominal holder system for custody and full "Delivery versus Payment (DVP)" for settlement [37][41][51] 2. Review of Chinese Overseas Bonds in H1 2025: Narrowed Spreads and Relatively Attractive Returns - **Primary Market Changes**: - **Chinese US Dollar Bonds**: The primary issuance improved, with the issuance scale from January to June 2025 reaching $89.4 billion, a 12% year - on - year increase. The issuance interest rate volatility decreased [52] - **Dim Sum Bonds**: The primary issuance slightly contracted, with a 9% year - on - year decrease in the issuance scale from January to June 2025. The issuance interest rates were differentiated [61] - **Secondary Market Performance**: - **Chinese US Dollar Bonds**: The index rose steadily, and the credit spreads continued to repair. The overall return rate as of June 30, 2025, was 4.23% [72] - **Dim Sum Bonds**: Priced against Chinese government bond yields, they followed the narrowing of on - shore credit spreads. As on - shore funds flow in and financing costs decrease, offshore spreads may narrow [82][92] 3. Outlook for Chinese Overseas Bonds in H2 2025: Southbound Connect Expansion Facilitates Layout - **Overview of the Hong Kong Bond Market**: As of the end of 2024, the outstanding scales of Hong Kong dollar bonds, offshore RMB bonds, and G3 currency bonds were $195.5 billion, $173.2 billion, and $565.6 billion respectively. CMU - hosted debt instruments are only a small part of the Hong Kong bond market [99][107] - **Investment Strategy for Chinese US Dollar Bonds**: Driven by the on - shore and offshore spread gap and the continuous implementation of debt resolution policies, urban investment US dollar bonds are expected to continue to perform well, and real estate US dollar bonds will also benefit. The primary supply of investment - grade financial and non - financial sectors is relatively sufficient, and valuations are still attractive [123] - **Investment Strategy for Dim Sum Bonds**: Considering the lock - in cost, Dim Sum Bonds are more cost - effective than Chinese US Dollar Bonds. With the expected influx of Southbound funds, there is a large narrowing space for Dim Sum Bond spreads, so they have high allocation value [7]

Core Viewpoint - The People's Bank of China announced three new measures to enhance the interconnectivity between the mainland and Hong Kong financial markets, aiming to support the development of the offshore RMB market and promote RMB bonds as a global high-quality liquid asset [1][3]. Group 1: New Measures Announced - The three optimization measures focus on improving the "southbound" operation mechanism of the Bond Connect, allowing more domestic investors to invest in the offshore bond market [3]. - The measures include facilitating domestic investors' access to multi-currency bonds, extending settlement times, and increasing the number of custodians [3]. - The scope of domestic investors will be expanded to include four types of non-bank institutions: securities firms, funds, insurance companies, and wealth management [3]. Group 2: Offshore Repo Business Optimization - The optimization of the offshore repo business mechanism is a significant part of the reforms, broadening the tradable currencies from RMB to include USD, EUR, HKD, and others [3]. - The Hong Kong Central Moneymarkets Unit (CMU) will adopt international practices by removing the freeze on pledged bonds in repos, enhancing liquidity [3]. - Simplification of bond account opening processes in the CMU will improve operational convenience, with plans for cross-border bond repo business to be introduced in the future [3]. Group 3: International Status of RMB Bonds - As of May 2025, foreign institutions held RMB bonds totaling 4.4 trillion yuan, a nearly 400% increase since the launch of the Bond Connect [4]. - A total of 1,169 foreign institutions from over 70 countries and regions have entered the Chinese bond market, indicating strong international interest [4]. - The weight of Chinese bonds in international indices has increased, with Chinese bonds ranking second in the FTSE Global Government Bond Index and third in the Bloomberg Barclays Global Aggregate Index, surpassing initial expectations [4].