The bond market, often characterized by institutional dominance, is currently under close scrutiny as the funding environment remains relaxedRecent trends indicate further declines in both short- and long-term bond yields, prompting an increase in liquidity and trading demands, particularly as investors navigate a landscape where coupon rates are notably lowAs we delve into the trajectory of the fixed income market, it's pivotal to consider that activity levels in 2025 could significantly escalate, revealing the intricate dance of bonds under the light of economic shifts.

To break down market behavior by category, we observe a striking compression of coupon rates for interest rate bondsWith long-term government bond yields dipping below 2%, they have consistently remained at these low levels, substantially under the weighted price of the DR007. In contrast, credit bond spreads have widened; however, the diminishing yield space of interest rate bonds suggests that credit spreads might soon accelerate their narrowing to more reasonable levels.

The burgeoning attention on interest rate bonds coincides with their historical lows in yields, which may suppress the demand for bullish sentiments in these securities

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Transactions suggest a marked shift, as mainstream bond players are increasingly redirecting their focus towards credit bondsIt’s anticipated that high-grade corporate bonds could emerge as the primary beneficiaries of the liquidity dividends in the evolving market climate.

Shifting our focus specifically to credit bonds reveals their increasing prominence, especially in 2024. Amid a substantial decline in risk-free returns, institutional behaviors are becoming critical for investorsThose looking for stable and attractive returns are finding high-dividend, high-coupon equity assets more popularNonetheless, these assets are becoming crowded, with capital concentration resulting in elevated risk for capital lossesThis scenario has prompted institutional investors to explore alternatives like credit bonds, which offer yields surpassing both deposit rates and government bond rates while considerably mitigating the capital's high volatility associated with dividend-bearing equities.

From a credit risk perspective, the current government policies aimed at debt resolution contribute to a more manageable credit landscape, creating a conducive environment for investments in credit bonds

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Given the characteristics of bond assets, it’s essential to note that credit bond ETFs may be particularly well-suited for retail investorsUnlike interest rate bonds that necessitate high-frequency trading to enhance yields, which can be challenging for less active traders, top-grade credit bonds exhibit favorable features such as higher coupon rates and elasticityThus, they facilitate less frequent trading, making them an appealing option for retail investors who cannot dedicate ample time to market monitoring.

A notable development in the market has been the recent approval of the Huaxia SSE Benchmark Market Maker Corporate Bond ETF (referred to as Credit Bond ETF Fund; product code: 511200; subscription code: 511203), set to officially launch on January 7 of the forthcoming yearThis fund is designed to track the Shanghai Stock Exchange's benchmark market maker corporate bond index, selecting bonds that conform to the Exchange’s market maker rules

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As of November 29, 2024, the index comprises 167 bonds, all carrying AAA ratings, predominantly backed by state-owned enterprises, which reduces credit risk significantlyMoreover, these bonds have varying maturities spanning from 0 to 30 years, aiming for a comprehensive yield curve coverage.

In terms of its composition, the ETF is primarily made up of general corporate bonds and perpetual bonds, along with a minor portion of urban investment bondsThe corporate bonds selected mainly represent high-grade AAA-rated symbols from state-owned enterprises, ensuring high liquidity and elevated safety in investmentAlthough urban investment bonds generally provide higher coupon rates, their liquidity could be less favorableFortunately, the market's concerns regarding the repayment risks of urban investment bonds appear to have been adequately addressed, with local platforms actively supporting debt resolution initiatives

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Furthermore, the management of bond issuance approvals for these bonds is becoming more rational and meticulous, further solidifying investor confidence in this asset class.

The blend of corporate bonds, perpetual bonds, and urban investment bonds enhances the diversification of the portfolio while hedging against credit risk, assuring that the product can maintain impressive coupon income even amidst pressures for high liquidityAn analysis of the Credit Bond ETF reveals several compelling advantages:

1. High Transaction Efficiency: The fund operates under a T+0 transaction model, enhancing capital turnover efficiency in contrast to typical bond funds, which usually follow a T+2 model.
2. Low Holding Costs: Investors are not burdened by redemption fees, with management and custodial fees kept at a mere 0.2%.
3. Superior Credit Ratings: The underlying assets boast AAA ratings, affirming their credibility and lower credit risk.
4. Enhanced Liquidity: The benchmark's market-making structure notably improves the liquidity and market pricing efficiency of the ETF.
5. Risk Diversification: By passively investing in a basket of bonds, the ETF effectively mitigates the influence of individual security performance on the overall investment portfolio.
6. Cost-effective: With its medium and short-duration characteristics, it presents lower interest rate and credit risks, making it a favorable choice in volatile market conditions.

As the pioneer of ETF products in China, Huaxia Fund has achieved remarkable successes in this segment