The bond market has proven to be a source of stability for investors, especially through pure bond funds, often affectionately dubbed “steady happiness.” Throughout the year 2025, however, this steady haven has found itself in turbulent waters, as persistent market corrections have challenged the once-reliable income streams of many bond fundsAs of February 18, over half of the pure bond funds on the market were reporting negative returns in the current year, a drastic departure from their usual performanceWith a spate of substantial redemptions occurring across various funds, the very foundation of “steady happiness” is being put to the test.

Insights gathered from industry insiders reveal that a convergence of factors is contributing to the ongoing struggles in the bond marketTight liquidity conditions, revisions to policy expectations, a recovering equity market, and profit-taking have all combined to place pressure on bond securitiesFunds focusing on medium- and short-term bonds, especially those that have been slow to deleverage, find themselves particularly vulnerable as market dynamics shiftExperts are urging fund managers to reconsider strategies involving excessive leverage or long durations; optimization of these portfolios may present more beneficial opportunities as the market continues to evolveFurthermore, seizing upon opportunities for segment trading amid the ongoing downward momentum in interest rates is seen as a critical pathway to achieving excess returns in bonds this year.

The disappointing performance of pure bond funds is glaringly evident in the current market landscapeSince the year began, persistent corrections have rendered considerable damage, and investors are left with meager returns, with the market humorously likening the marginal profit of one basis point to a mere “egg.” Data compiled by Wind showcases that as many as 1,200 pure bond funds—or over 50% of them—have recorded negative returns thus far in 2025. This dramatic decline is notable compared to average returns of 0.58% in 2024 and 0.48% in 2023.

Among the underperformers, notable mentions include funds like Pengyang Chuxing 3-Month Open-End Bond A, Ping An Huixu Pure Bond A, and Hongli Yili A, all of which have experienced losses exceeding 1% since the start of the year

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Compounding the woes, the fourth quarter of 2024 saw substantial withdrawals from some funds, with Ping An Huixu reporting redemptions totaling approximately 29.64 billion shares, reducing its size considerably to just 222 million shares.

Further investigation reveals that more than twenty pure bond funds have raised their net asset values sharply due to significant redemptions, placing many of these products in a precarious financial positionReports indicate that a majority of these funds, held primarily by institutional investors, encountered multiple rounds of large withdrawals in January 2025, exemplified by Heisheng and An Pure Bond and Baijia Baixing funds.

A few bond funds have managed to post positive gains, thanks to successful duration strategies employed last yearFor instance, Haitai Baoxing Anyue A managed to achieve an impressive annual return of 17.96% in 2024, with its portfolio duration reaching an exceptional 19.53 years, the highest among pure bond fundsAs of mid-February 2025, this fund has observed a modest return of 0.75%. However, as longer-term bonds face corrections, losses in net value have become increasingly evident.

Given the backdrop of ongoing pressure, experts point to multiple reasons for the current state of the bond marketThe once-promising bond bull market has dampened investor sentiment significantlyTight liquidity conditions are at play, with both market price levels and the extent of tightening exceeding expectationsKey contributing factors include actions taken by the central bank to regulate monetary flow, pressures surrounding foreign exchange stability, and an increased supply of government and local bonds at the beginning of the year.

Moreover, shifts in policy expectations have led the market to reevaluate previous anticipations of “moderately loose” monetary policyAccordingly, both the intensity and timing of anticipated policy measures have come under scrutinyAdditionally, it is critical to note that an upsurge in equity market performance has stimulated risk appetite among market participants, serving to place additional downward pressure on the bond market

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After the rapid ascension seen since November 2024, bullish sentiment in the bond market now requires calibration and recalibration as institutions engage in profit-taking.

A fixed income manager from a Shanghai fund underscored the dual pressures at play: on one hand, policy adjustments and fluctuations in market expectations have contributed to rising market interest rates; on the other hand, speculation around potential expansions of monetary easing have failed to materialize into actionable policy changes, causing funding costs to rise insteadShould investment varieties fail to deliver price appreciation that compensates for insufficient yield, institutions could face challenges in delivering returns that outweigh their costs.

Examining specific securities illustrates this trend further; since the onset of 2025, the yield on one-year government bonds has risen approximately 40 basis points, while yields on three-year bonds have seen increases over 25 basis pointsIn contrast, the fluctuations observed in the ten-year and thirty-year bond yields have remained relatively mutedGiven the elevated prevailing costs of debt, many bonds now yield more than a vast array of traditional rate bonds and nearly all credit bonds, meaning that incorporating leverage into pure bond funds may result in suffering significant spread losses.

The fixed income research team at Debang Securities advises a reconsideration of prevailing assumptions surrounding long-end interest rates, advocating for a nuanced understanding of economic conditions rather than binary thinkingThey argue that indications of positive economic fundamentals suggest an overall landscape where significant downward movement in interest rates may be shaky at best.

Additionally, the relatively low attractiveness of bonds when compared to emerging equities, buoyed by tech stocks reinvigorating risk appetites, weakens bonds as an asset classWith the global environment characterized by high inflation and elevated rate structures, the absence of catalytic factors makes it unlikely for the market to display independence from broader trends.

Experts assert that the extent of yield declines in 2025 is unlikely to match the previous year

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