Entering 2024, factors such as global central bank interest rate cuts, the conflict between Palestine and Israel, and the overflowing Red Sea crisis, as well as multiple national elections, have left the market in suspense. As for the bond market, there was a global bond issuance frenzy at the beginning of the year, but the market is still concerned about the risk of bond defaults. Indian bonds are about to be included in the MSCI Emerging Market Government Bond Index (MSCIGBI-EM), and the Bank of Japan will eventually exit Negative Interest Rate and Yield Curve Control (YCC). How will all these factors affect the global bond market and investor portfolios? Should we increase our holdings of emerging market bonds? How is China's bond market expected to perform this year?

01 Interpretation 1 | Will international conflict crises push up inflation again? Geopolitical conflicts do indeed limit shipping, but primarily container transportation rather than oil transportation. Therefore, as of now, its impact on the circulation of oil is not as significant as its impact on the circulation of goods. This is related to the fact that container transportation of goods in the waters near the Red Sea is much busier than oil transportation. Next, it is important to observe the development of conflicts. If the conflict continues to escalate and affects the Strait of Hormuz, it will have a significant impact on oil circulation. In this situation, we will see a surge in oil prices. There are two things to pay attention to regarding the broader impact of the event on inflation: firstly, we are currently in a busy period of the Chinese Lunar New Year, during which there is a huge flow of goods trade on international waterways. The current conflict is restricting and extending the transportation time of these goods. Once the Chinese New Year passes, global demand for goods will decrease, and container cargo transportation will also decrease accordingly. The related restrictive effects will naturally weaken. Secondly, so far, when discussing the impact of the incident on their profit margins and other pricing aspects, consumer companies have indicated that the impact is quite moderate, around 1.2%. At present, they are still able to bear the resulting cost increase. The question is whether consumer companies can absorb higher transportation costs if the conflict persists. Overall, it is expected that the impact of the event on inflation will not be significant, but it is certainly necessary to closely monitor subsequent developments.

02 Interpretation 2 | How does the expectation of global central bank interest rate cuts affect the global bond market? Major central banks around the world, such as the Federal Reserve, the European Central Bank, and the Bank of England, are expected to start their interest rate cutting cycle later. For the Federal Reserve, it is expected to take action later than the current market pricing point. The current pricing in the market is that the Federal Reserve will begin its first interest rate cut in March, while our forecast is for mid year, as the current inflation or potential inflation level in the United States is still above the target level of 2%, which will give the Federal Reserve more time and space to implement rate cuts. But at the same time, we also expect that the duration of the Federal Reserve's current interest rate cut cycle may be longer than the market currently expects, and will continue until 2025. Moreover, due to the Federal Reserve's interest rate cut taking place against the backdrop of strong economic conditions and overall demand in the United States, the economy will be able to achieve a "soft landing". For the market, once the Federal Reserve starts cutting interest rates, animal spirits will be boosted. This is obviously beneficial for the stock market. At the same time, the bond market will also improve, which is why we believe that historically, this year's investment environment has been very attractive for fixed income investors. Specifically, when the Federal Reserve begins to cut interest rates, investors need to extend the term and start buying bonds with relatively longer maturities. Despite a significant rebound in short-term bonds last year, we believe that the interest rate cutting environment may be very favorable for the belly/middle of the bond yield curve, namely 5-year and 7-year bonds, as these bonds will benefit the most from the rate cuts. In addition, interest rate cuts will also lead to a steepening of the yield curve. 03 Interpretation 3 | What investment strategies should investors adopt in the European and American bond markets? Due to budget balance issues in the United States, there will be a large number of new bond issuances this year. In this context, the end of the yield curve, namely long-term and ultra long term US bonds, will be under pressure. Although this pressure is controllable, it does lead investors to be more inclined to buy the "belly" of the yield curve, which is the 5-year US Treasury bond. In addition, as 5-year US bonds are more popular with investors than long-term and ultra long-term US bonds, we also prefer steep yield curve investments in the US bond market this year, especially for 5-year US bonds and 30-year US bonds. For the European bond market, it is worth emphasizing that all European countries have entered the post pandemic era in an environment where their future fiscal capacity is relatively more limited. Based on this, in the next economic recession, especially during severe economic downturns, governments around the world will have to resort to significant fiscal stimulus measures to save the recession, given limited fiscal space. Therefore, this may cause greater bond market volatility in the future, especially during economic downturns.

04 Interpretation 4 | How is China's bond market expected to perform this year? At present, both the yield of treasury bond bonds and the yield of credit bonds are lower than that at the beginning of 2023, so from the perspective of objective yield basis, the bond market yield in 2024 is expected to be slightly weaker than that in 2023. Starting from October 2023, monetary policy has been paying more attention to the impact of idle positions, resulting in a certain increase in the cost of funds between banks. Currently, the cost of funds between banks is still relatively high, and as a result, the short-term bond market may maintain a relatively volatile level. In the medium term, against the backdrop of insufficient total demand and the ongoing window of economic growth momentum conversion, there is no probability of a trend tightening of monetary policy. Moreover, as can be seen from the monetary policy goals set by the Central Economic Work Conference, a reasonable and sufficient liquidity tone is still maintained. Therefore, the rebound in the yield level of medium-term bonds will not be very high, and the systemic risk of the bond market is not significant. Overall, the bond market opportunities in 2024 are worth looking forward to. Therefore, in terms of investment layout, investors also need to do a good job in asset allocation to improve the investment experience, and strive to use the "pure bond base, convertible bond thickening" as a powerful tool for asset allocation. On the one hand, compared to pure bond funds, the range of asset allocation options for the first tier bond base is wider, which can effectively reduce the risk of single asset volatility while seizing the opportunities in the bond market. Taking the bond market adjustment period from August to October 2023 as an example, the CSI All Bond Index fell by a cumulative 0.69%, while the primary bond base index fell by only 0.35% during the same period. On the other hand, the first tier bond base strives to increase returns by allocating convertible bonds with a certain position. Convertible bonds balance equity and debt, and have the characteristic of both offense and defense, which is also more conducive to controlling portfolio drawdowns. In terms of investment direction, serving the national strategic direction will be the key point: according to the relevant requirements of the Party Central Committee for financial work, the China Securities Regulatory Commission, the China Securities Association, the Shanghai and Shenzhen Stock Exchanges, the Association of Dealers and other bond regulators have repeatedly proposed to further promote the innovation of bond products, and encourage issuers to issue green bonds, carbon neutral bonds, science and innovation bonds, rural revitalization bonds, the Belt and Road bonds and other special varieties. In terms of innovative business, the number of public REITs issued in 2023 has significantly decreased due to sluggish market performance and strict audit requirements. However, in the second half of the year, with the reporting of new categories such as consumer REITs, the introduction of traditional categories such as highways, affordable rental housing, and industrial parks has accelerated. With the landing of expansion, a dual drive pattern of new issuance and expansion has been formed, laying a solid foundation for market expansion and business models. At the same time, with the continuous expansion of bond financing scale for private enterprises and real estate enterprises, the issuance of credit risk mitigation tools such as CRMW can effectively boost market confidence, promote the expansion of bond financing channels and financing scale for private enterprises and real estate enterprises, and effectively reflect the concept of new financial tools supporting the development of the real economy. Therefore, continuing to promote the issuance of various special bond varieties and vigorously developing innovative financial instruments such as public REITs and CRMW to better serve the real economy and national strategy will be the key focus of the bond market in 2024.