The bond market is feeling the effects of significant fluctuations, commonly referred to as the "seesaw effect" with stocksRecent months have seen a heightened volatility in the debt market, culminating in substantial redemptions across various bond fundsAs a result, some investment advisory portfolios have made the cautious move to reduce their bond holdings.

This tumultuous phase for the bond market has taken root since the beginning of the year, transitioning from short-term to long-term pressuresWhere there once stood a bullish backdrop with rising yields, the market has entered a period marked by headwindsNotably, the downturn began earlier on the short end, exemplified by the ongoing decline of the 2-year treasury futures contract since January 3. Conversely, long-term bonds have taken a sharper nosedive post-Chinese New Year, exacerbating the situation.

Several fund management firms have identified that continuous consolidation within the debt market, coupled with tightened liquidity and an uptick in risk appetite, may be responsible for its recent adjustments.

"The underlying issue remains the tightening liquidity, which has created a significant strain in the bond market," stated the macro strategy division at Bosera Asset ManagementThey noted that after the holiday, the overnight and 7-day funding rates experienced a prolonged phase of inversion, with the tight balance of funds continuing to suppress market sentiment closely tied to these funding costs.

As the bond market undergoes this turbulent reassessment, institutional behavior has emerged as a key influencing factor on future outcomesNumerous bond funds have experienced notable redemptions, leading various advisory portfolios to decrease their exposure to fixed income instruments, reflecting evident profit-taking pressures.

A detailed analysis reveals that on February 18 alone, several notable funds such as the Zheshang Huifeng Regular Open Bond Fund and the Caitong Huili Pure Bond Fund reported significant redemptions, leading to adjustments in the funds' net asset values

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Over the course of the current year, approximately 30 bond funds have similarly had to adjust their valuation metrics in response to large-scale redemptions.

On February 11, some of the more conservative advisory groups made a move to rebalance their portfoliosThe "Biaoji Flat Perfect Bonds" strategy from Guolian Securities reported a significant reduction in the allocation to bond index funds—from 19% down to 6% for three index funds—and a further dip in the ongoing management of medium- to short-term bond funds by 2 percentage pointsAccording to the chief strategist, the increased uncertainty surrounding the macroeconomic landscape led to expectations of a sustained tight balance in funding ratesHence, while the bond market saw initial gains, the potential for lucrative returns has waned, prompting an adjustment in positioning as the equity markets exhibited signs of increased risk appetite following their own strong starts.

Zhuyue from Caitong Fund’s fixed income research department underlined that in the prevailing low-interest-rate environment, there has been substantial deleveraging of short-term interest rate bonds by funds themselves in January, leading to the subsequent downturn in short-end rate evaluationsMeanwhile, institutional players like rural commercial banks and insurance firms have opted to bolster their holdings in long-duration government bonds, lending some degree of support to the long end of the yield curveShould the market remain devoid of strikingly negative conditions in February, there's a likelihood that institutions will continue to pursue yield by extending durationNevertheless, with the flattening of the yield curve, the scope for gains remains limited, putting the spotlight on the pressures resulting from profit-taking by institutions.

As the debt market continues on this turbulent path, investors must recognize key factors integral to navigation during periods of volatilityWhat strategies can be employed to fortify their positions amidst such fluctuations?

Wang Jingrui, the executive general manager of the mixed investment division at Pengyang Fund and manager of the Pengyang Double Benefit Fund, posits two crucial conditions to determine if the bond market's correction is sufficient: the timing of a potential decrease in financing costs and the moment when market risk appetite could retreat once again.

When diving deeper into investment strategies, Li Weikang, manager of the Hang Seng Qianhai Bond Fund, highlighted that as we approach the upcoming Two Sessions, the likelihood of a reduction in the reserve requirement ratio is increasing

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