SHANGHAI (Reuters) – Sharp declines in Chinese bond prices as the government takes steps to boost the economy have prompted an investor outcry and a rush of redemptions, putting pressure on asset managers to restore confidence in their fixed-income products.

Asset managers are urging investors to hang on, as the products may recover from their current losses, but some investors have shifted money out of the market and some analysts warn the bond bull market may be over.

Lured by the safety of treasuries, investors rushed into bond-focussed products earlier this year as prospects for the world’s second-largest economy darkened and stock prices sank. They were caught off-guard when bond markets tumbled this month as the government eased some of its strict COVID-19 curbs and announced steps to support the property sector.

China’s benchmark treasury yields are at four-month highs, with the five-year surging more than 30 basis points from its end-October low to 2.721% and the 10-year up more than 20 basis points to 2.865%. An index of treasury prices, which move inversely to yields, has tumbled 1.5% this month, wiping out months of gains.

Shanghai resident Wan Maoyuan said he could not understand why the one-year bond fund he bought three months ago could be showing a loss. “I bought it previously on the perception at least the product can guarantee my principal,” Wan told Reuters.

Although investors will not realise losses on many of the products if they hold them to maturity, recent changes in asset management rules require net asset values to be disclosed in real time – a rude shock for investors unused to seeing fluctuations.

“We deeply understand your anxiety in a volatile market,” HZBank Wealth Management, a unit of Bank of Hangzhou, told investors in a letter on Wednesday. “We will continue to safeguard your wealth by your side.”

END OF BULL RUN?

The Bank of China’s asset management unit also asked investors not to worry.

“Markets rise and fall. Investors need faith and a serene heart,” BOC Wealth Management said in a public letter to investors, suggesting clients view volatility “from a rational and long-term perspective.”

A slew of other asset managers that sell banks’ wealth management products to risk-averse investors, including Nanyin Wealth Management and CIB Wealth Management, wrote similar letters of good cheer.

Some investors are not convinced.

Retiree Shen Jian shifted 400,000 yuan ($60,000) from a fixed-income product sold through the Bank of Communications into three-year deposits, citing recent “intolerable” performance.

After the recent bond selloff, Chinese regulators have asked some financial institutions to report their liquidity conditions and how they respond to redemptions of wealth management products, three people with knowledge of the matter told Reuters.

The bond slump “is primarily the result of stronger market optimism towards future economic recovery” and expectations the central bank will be less accommodative as liquidity tightens, said Mary Xia, China rates strategist at UBS Securities.

China’s seven-day repo rate, a benchmark for short-term money market rates, has stayed above 1.8% most of this month, a sign of tighter liquidity.

“It may still take some time for economic data to recover, and weakening data in the near term could to some extent offset the drag on the bond market from a higher risk appetite,” Xia said.

CIB Research analyst Xu Hanfei wrote in a note to investors that China’s “frothy” and “over-crowded” bond market could suffer from “hefty” price declines the rest of the year on a turning point in COVID policies and improving risk appetite.

Xu forecasts the end of Chinese bonds’ bull market, with the 10-year yield rising to a one-year high around 3%.

($1 = 7.1331 Chinese yuan renminbi)

(Reporting by Jason Xue, Samuel Shen and Brenda Goh; Editing by William Mallard)

---