Is it worth buying at 2.1% for 10 years?

After a round of bull market in the bond market in the first half of the year, investors are facing new choices: yields have dropped to low levels, is it still worthwhile to allocate credit bonds with 10-year yields still above 2.1%?

The Guojin Securities Fixed Income Team released its latest strategy report on July 12, believing that with bond yields continuing to fall, the space for capital gains and the investment odds have both significantly narrowed. Since the beginning of this year, the comprehensive yield of 10-year AA+ medium-term notes and AAA- subordinated bonds has exceeded 4%, but it is getting increasingly difficult to replicate the first-half market performance in the second half.

The report reviews multiple rounds of bond bull markets from 2016, 2018, 2022, and 2024, finding that the top-ranking bond funds in the first half of the year usually do not proactively reduce duration or leverage in the second half, but continue to adopt an aggressive stance in order to compete for rankings, attract funds, and achieve their return targets. However, historical experience also shows that the returns from continued aggression in the second half often decline significantly, and once market volatility increases, previously accumulated advantages are more easily eroded.

Guojin Securities believes that as capital gains gradually fade, bond investing returns to the era of "earning coupon income." But whether it is downgrading credit, allocating perpetual bonds, or extending duration, the path to higher coupon income has become increasingly crowded. Rather than chasing returns, it is more worthwhile to wait for a better buying point.

The Three Paths to Enhanced Coupon Income Are Becoming Harder

As the space for capital gains narrows, coupon income once again becomes the main source of returns, but the report believes that the major paths to enhanced yield currently face new constraints.

First is downgrading urban investment credit.

After entering the concentrated ratings tracking period from June to July, there has been an increase in rating downgrades and rating terminations, and funds have started reducing holdings of 1-to-5-year AA(2) and AA- urban investment bonds. Some low-quality urban investment bonds have yields obviously higher than their valuations. Guojin Securities believes that risks are still controllable at present, but the credit spread is no longer sufficient to fully compensate for potential volatility, and the stability of relying solely on credit downgrading to obtain excess returns is declining.

Next is 5-year subordinated perpetual bonds.

Although issuance of bank subordinated perpetual bonds has accelerated significantly since June, market transactions have actually become more subdued. The current spread between 5-year AAA- subordinated bonds and 10-year government bonds has shrunk to about 14 basis points.

The report notes that this segment has entered an awkward situation of "making money slowly, losing money quickly": If you bet on falling rates, it is better to simply allocate 10-year government bonds; if you aim to earn coupon income, it is insufficient to cover price volatility. Therefore, funds are gradually shifting focus to 5-to-10-year subordinated capital bonds, with net fund purchases reaching 5.3 billion RMB in the past week.

Finally, ultra-long duration credit bonds.

Taking the State Grid medium-term note with a remaining term of about 14 years as an example, its current yield can still reach about 2.18%. Under the backdrop of scarce high-coupon assets, it retains some attractiveness. However, the report cautions that since July, the net prices of some ultra-long credit bonds have begun to retreat, and trading activity has dropped to a low level for the year, indicating that liquidity risk is starting to be reflected in prices. High coupons still exist, but realizing the returns requires taking on greater price volatility.

Is 10-year 2.1%+ Worth Buying?

Regarding the most watched market timing for allocation, Guojin Securities gives only two key words—wait.

The report recommends paying attention to left-side allocation opportunities for 5-year major bank subordinated capital bonds when yields rebound to 1.90% to 1.95%, and for 5-year perpetual bonds when yields are between 1.95% and 2.00%; for 10-year subordinated capital bonds, it is recommended to wait until yields rise to 2.20% to 2.25% before gradually entering.

For portfolio allocation, the base should still focus on 3-to-5-year high-quality medium-to-high-grade credit bonds, and during periods of intensive ratings tracking, the proportion of low-quality urban investment bonds should be appropriately reduced. Ultra-long credit bonds are more suitable for accounts with stable liabilities and long assessment periods as a tool for coupon enhancement, while portfolios with volatile liability sides should control positions.

The report finally points out that the real issue in the current market is not a lack of investible assets, but how much longer the low-volatility environment can last.

In other words, for 10-year credit bonds with yields around 2.1%, the investment value has not disappeared, but the cost-effectiveness of continuing to chase highs has clearly declined. Given limited coupon advantage and reduced price elasticity, waiting for yields to rebound may be more important than rushing to act.

Risk Warning and DisclaimerThe market has risks; investments should be made cautiously. This article does not constitute personal investment advice, nor does it consider the special investment objectives, financial status, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their specific circumstances. Investment based on this is at your own risk.