The Rising Trend of Fixed Income Products

In today's volatile financial landscape, with the stock market facing persistent declines and the real estate sector struggling to regain its footing, investors are shifting their attention toward fixed income productsThis shift is underscored by the significant influx of capital into bank deposits, which have traditionally been a safe haven for conservative investorsHowever, as bank deposit interest rates continue to be slashed, their appeal has waned, prompting a remarkable transformation in the investment landscape where money increasingly flows into bank wealth management and pure bond funds.

Recent statistics highlight this trendBy the end of June, the existing scale of bank wealth management products soared to an astounding 28.52 trillion yuan, reflecting a 7.99% increase from the previous yearThis upward trajectory persisted into July and August, with the scale nearing or even exceeding 30 trillion yuan. Furthermore, the first half of the year witnessed the issuance of new public funds predominantly focused on bond investments, emphasizing the magnetic allure of fixed income products.

However, as the popularity of these products surges, it is crucial to understand the underlying risks associated with themInvestors may be drawn in by the promise of stability and consistent returns, but are fixed income products truly devoid of risk? The answer, unfortunately, is noInvesting in bank wealth management and pure bond funds does come with its share of risks, primarily linked to the inherent nature of bonds.

Credit Risk

Among various risks, credit risk looms large as the most significant threat to bondholdersWhen a company encounters a debt crisis, its issued bonds often become unredeemable, resulting in severe losses for investors

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A notable example includes the situation with companies like Evergrande, where bondholders faced dire circumstances as the company struggled to meet its obligationsThis is a stark reminder for investors in bond funds or bank wealth management products, as the ripple effects of such failures can be felt widely.

For individuals investing in bank wealth management and pure bond funds, foreseeing which products might face credit woes is virtually impossible, leaving them to rely on the expertise of institutional investorsFortunately, these investment vehicles often take measures to diversify their portfolios, thus mitigating the impact of a single bond defaulting.

Interest Rate Risk

The most common risk encountered by average investors is undoubtedly interest rate risk. It is widely understood that bond prices and yields move inversely; when bond yields increase, prices tend to fall, which can lead to losses in bank wealth management and pure bond fundsThis relationship signifies a daily challenge for investors in the fixed income sphere.

Interest rate volatility is typically measured by a technical indicator known as duration. While the concept of duration can be complex, the essential takeaway for investors is straightforward: the longer the duration, the greater the interest rate risk. This means that bonds with longer durations may experience more significant price fluctuations and, consequently, more substantial potential losses.

As of mid-2023, the average duration for medium- to long-term pure bond funds stood at 2.37, up from 1.96 at the end of the previous year

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Notably, the fluctuations faced by bank wealth management and bond funds in November 2022 due to rising interest rates left many investors with vivid memories of this volatilityComparatively, at the end of June 2022, the average duration was 1.77.

Clearly, the current phase poses a heightened interest rate risk for fixed income productsTo mitigate potential losses, investors may consider reallocating to short-term products, such as short-duration bond funds or cash management products, to effectively reduce duration.

Liquidity Risk

Liquidity risk manifests in two primary ways with fixed income investmentsFirstly, certain bonds, particularly corporate bonds, may exhibit liquidity constraints due to low trading volumes, leading to scenarios in which investors are unable to buy or sell assets promptlySecondly, the potential for large-scale redemptions from bank wealth management and pure bond funds can pose challengesFor instance, if an investor needs to redeem funds suddenly during a period of high demand, they may find themselves unable to access their capital in a timely manner.

Other Risks

Investing in fixed income products may also expose investors to other forms of risk, such as policy risk and exchange rate risk. For instance, if the central bank enacts measures to stabilize long-term government bond yields, it can inadvertently lead to decreased yields across the board, resulting in losses for bond funds and bank wealth management productsAdditionally, in a globalized investment landscape, funds that include international bonds face the risk of currency fluctuations impacting their returns.

In conclusion, while fixed income products are increasingly attractive to investors seeking to escape the tumultuous stock market and real estate uncertainties, it is vital for them to remain vigilant

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