As the optimism surrounding the bond market in 2024 faded, investors found themselves grappling with the disheartening reality of yielding returns that fell far short of their expectationsFor instance, an individual referred to as Mu Mu had invested in fixed income financial products at the beginning of the year, eager to reap the benefits of what many labeled a "bond bull market." However, upon reviewing her investments, she discovered that regardless of whether she had chosen shorter-term quarterly products or those with a maturity of six months to over a year, the annualized returns hovered around a mere 2%, never exceeding 3%.

"Isn’t it true that banks primarily invest in the bond market? Why is it that last year, a supposedly robust bond market, my yields remain so low?" Mu Mu wondered, caught in a whirlwind of confusion.

Upon checking her potential alternatives on platforms like Alipay, Mu Mu's dismay grew as she noted that average annualized returns for medium and long-term bond funds stood at 5.28%, short-term bonds at 3.20%, and bond index funds at 5.76%. The “fixed income plus” products averaged an enticing 5.83%. This disparity incited further curiosity about the differences between her chosen fixed income products and the returns seen in the broader bond market.

The year 2024 saw a significant drop in the yields of government bonds across various maturities, with the one-year, ten-year, and thirty-year government bond yields hitting lows of 0.93%, 1.69%, and 1.95%, respectively

The decline in long-term rates exceeded 80 basis points, marking the steepest drop since 2016, while short-term rates plunged by over 100 basis points, contributing to an impressive bull market for bonds.

As the bull market progressed, a stark contrast emerged between the average yields of bond funds and fixed-income bank productsData analysis showed that the average annualized return for bond funds reached 4.51% in 2024. Specifically, short-term pure bond funds returned an average of only 2.73%, while their median was slightly higher at 2.94%. In contrast, middle and long-term pure bond funds yielded better results, averaging a return of 3.82% with a median of 4.58%.

Meanwhile, for fixed-income bank products, the average annualized return year-to-date was recorded at a disappointing 1.89%, with a median yield of 1.97%. Pure debt fixed-income products offered an average return of only 2.39%, while those denoted as "fixed income plus" fared slightly better at an average of 2.94%.

The highest yield observed for bond funds eclipsed the returns from fixed-income bank products, with the Pengyang Zhongzhai 30-Year Treasury ETF achieving an annualized return of 22.36%. Additionally, the Guangda Mid-High Grade A and ICBC Ruijing also yielded returns exceeding 20%. By contrast, the highest yield in the bank’s financial products was a pallid 13.56%, achieved by the shortest holding period product from Pudong Development Bank.

This disparity begs the question: Why such a difference in yield between bond funds and fixed income bank products?

The divergence in returns can be boiled down to both objective factors—such as the underlying asset categories and their respective composition—and subjective factors that stem from the products' marketing strategies

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A bank wealth management professional explained that the differences in returns primarily arise from the types of underlying assets involvedGenerally speaking, pure fixed income management products do not include equity assets; they typically consist of deposits, non-standard assets, government bonds, and corporate bonds, often maintaining a balanced allocation among these asset typesIn contrast, pure bond funds consist entirely of rate bonds and credit bonds that fluctuate with the market, devoid of deposits or non-standard assets.

In periods of rapidly declining interest rates, the substantial allocation of low-yielding assets such as non-standard assets or deposits in bank products drags down overall returns, causing pure bond funds to outperform fixed income productsConversely, during periods of bond market adjustments, pure fixed-income products may demonstrate stronger resistance against declines, showcasing their stability

As one expert succinctly put it, "High yield and stability do not coexist."

The quarterly report of a fixed income product exemplifies this dynamicIn the report, the underlying assets revealed that cash and bank deposits constituted a mere 0.28%, with interbank certificates accounting for 2.66%, and non-standardized debt assets making up 33.50%, while bonds only accounted for 62.92% of the overall asset allocation.

With the underlying non-standard assets primarily consisting of interbank loans or trust loans, which provide higher returns compared to deposit-type assets but also come with a larger variance, the expected yield over maturity spanned between 2.5% to 4.5%. Meanwhile, the median yield for the entire spectrum of non-standard assets was a modest 4.12%, averaging around 1.88%. This lack of consistency results in a subpar experience for investors.

In sharp contrast, the composition of bond funds, as shown in a report from a medium-short bond fund, revealed that bonds constituted an overwhelming 99.67% of the total assets, with bank deposits and settlement reserves making up a meager 0.25%. Across the entire market, data showed that a staggering 96.04% of investments in bond funds were dedicated purely to bonds, with only 1.24% in cash and a fraction of 0.91% allocated to stocks.

Bond duration also factors into this discrepancy, as longer bonds typically yield more than shorter ones

During a bond bull market, medium to long-term bonds tend to outperform short-term optionsAdditionally, bond funds often hold bonds with longer durations compared to their fixed-income counterparts.

Research from Shenwan Hongyuan Securities indicates that bond fund managers increased the duration of their bond portfolios significantly last yearBy showing both the interest rate sensitivity duration and the durations of their top five heavily weighted bonds, the duration for portfolios predominantly targeted at medium to long-term bonds reached 2.56 years by Q2 2024, a notable increase from 2.04 years observed at the beginning of the year, making it the highest level in three yearsSimilarly, by Q3 2024, the duration of heavily weighted bonds in bond funds climbed to 2.12 years, marked as another three-year high.

In contrast, fixed income products offered by banks often invest in bonds with durations ranging from 2 to 3 years

According to China International Capital Corporation's fixed income research, government bonds in the first half of last year saw their average duration increase from 1.28 years to 1.49 years, while the duration of credit bonds remained relatively stable, shifting only slightly from 1.18 years to 1.13 years.

The investors’ perception of returns is also influenced by how the changes in the net asset values of these financial products reflect the distribution of yieldsFor Mu Mu, her choice in financial products came at a time when the advertised rates were around 4% to 5%, but once she invested, the decrease in returns was evident.

Research indicates that this phenomenon stems from the “marketing performance” strategies employed by banksCertain financial products may have initially displayed attractive past performance while operating under smaller scales, thus offering shorter periods of manipulated returns through leveraged strategies

However, following a successful customer influx based on this enticing marketing, the products returned to more average performance levels.

Looking ahead, it is important to clarify that a continuation of the bond bull market does not guarantee high yields for fixed-income productsUnder the overarching trend of declining bond yields, both buy-and-hold or trading strategies might face significant constraints moving forward.

A bond trader from a state-owned bank candidly admitted to reporters that present coupon rates struggle to meet performance benchmarks for wealth management productsStrategies involving increased trading volume, prolonged holding durations, or increased allocations to newly issued municipal bonds could ultimately lead to heightened volatility with diminished absolute returns due to declining coupon income stability, especially during market rebounds.

The historical low levels of both short- and long-term yields signal a continuing downward trend