Investors Seek Lower-Cost Investment Alternatives

In recent months, a noticeable trend has emerged in the realm of monetary funds, reflecting broader economic shifts and investor sentimentsHuang Ya, a pseudonym for an investor in Fujian, recently realized that the yield on her selected money market fund had plummeted to around 1.2%. This contrasts starkly with her initial experience a decade ago when the annualized yield once soared to nearly 6%. The implications are significant—her annual returns on an investment of 10,000 yuan have shrunk from nearly 600 yuan to just 120 yuan, a staggering decline of 80%.

Huang’s experience resonates with many conservative investors in money market instrumentsRecent trends have consistently shown a downward trajectory in yields for these fundsData revealed that by December 16, 119 money market funds had recorded a seven-day annualized yield of less than 1.3%, with 39 of those dipping below 1%. This shift has placed these monetary funds in an unusual position; while their yields still outpace standard savings account rates, they frequently fall short when compared to one-year deposit rates, which is becoming a normalized phenomenon.

Faced with dwindling yields, some investors have begun actively reassessing their portfolios

Shifts towards interbank certificate index funds and other alternatives have gained traction among this demographicAdditionally, certain investors are opting to sacrifice liquidity and increase their risk exposure, moving towards low-risk wealth management products and pure bond funds.

The declining yields have elicited responses from the market participants who view the current environment as a turning pointThe yields on these monetary funds, which previously represented pockets of stability, are now challenged by their underlying investment exposures which have also seen significant changesGenerally, the investment options for money market funds include cash, bank deposits with maturities of one year or less, repurchase agreements, central bank bills, and interbank certificates.

For instance, Tianhong's Yu'ebao fund, the largest of its kind, reported in its Q3 2024 financials that over 67% of its assets are allocated to bank deposits and settlement reserves, while nearly 90% of its fixed-income holdings consist of interbank certificates

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Given this allocation structure, it's clear why the fund's performance might be sensitive to fluctuations in deposit rates.

The situation regarding deposit rates has been particularly concerningIn recent years, China's bank deposit rates have undergone multiple rounds of cuts, landing at new historic lowsFor instance, the average interest rates for three-month and six-month fixed deposits stood at approximately 1.268% and 1.471%, respectively, as of OctoberThis sequential decline has compressed the arbitrage opportunities between interbank deposits and regular bank deposits, reinforcing trends towards monetary policy adjustments that further suppress yields.

In the context of a relatively loose monetary policy framework, bond market yields have followed a similar downtrend, caressing the performance of money market funds and suggesting a continued downward trajectory in their yields

Yet, amid these low-return environments, there are indications that the market still holds significant potential for growth.

Interestingly, prior to this sharp downturn in yields, the market size and investor count for money market funds had reached significant heightsStatistics from the China Securities Investment Fund Industry Association indicate that by the end of October 2024, other fund types such as stock, mixed, and bond funds saw declines in total volume, whereas money market funds attracted an additional 439 billion yuan in inflows.

Moreover, the number of investors engaging with money market funds hit an all-time highBy the end of Q2 this year, the cumulative number of individual accounts holding money market funds was reported at 1.852 billion, marking an increase of over 62.71 million accounts since the end of 2023. One analyst in Southern China pointed out that the uptick in money market fund volumes can be attributed largely to the unwinding of deposit rates, leading to a comparative decline in the attractiveness of savings products and resulting in a migration of funds into the money market domain.

As yields continued to fall, investors began to seek “substitutes.” Among these alternatives, interbank certificate index funds have garnered increasing attention

These instruments allow individual investors to indirectly participate in the interbank lending market, typically offering higher yields than standard deposit products due to their negotiated rates among financial institutions.

Thus far in 2023, index funds linked to interbank certificates attained relatively high overall returns, with data indicating that by December 16, the AAA index for similar certificates yielded a year-to-date return of 2.3%. The performance of over 70 rated products reflected positive returns, with 45 of them achieving annualized returns exceeding 2%.

In the sales domain, there has been a remarkable demand surge that has led numerous fund products to close pre-sales ahead of their schedulesA notable instance occurred on December 5, when the BlackRock Interbank Certificate AAA Index Fund reached its subscription ceiling, ultimately recording a subscription confirmation ratio of 73.36%! This was followed closely by the Agricultural Bank of China acting similarly shortly thereafter, resulting in a swift capital raise.

However, with the recent establishment of self-discipline regulations regarding interbank deposits, as well as the steering of monetary policy towards being moderately easing, the interest rates on interbank certificates are likely to face downward pressure, opening up pathways for lower yields

Already, it has been reported that the one-year AAA interbank certificate rate has declined by more than 20 basis points over the past two weeks.

In addition to these instruments, some investors are also willing to accept greater risk, compromising a certain degree of liquidity in the pursuit of higher returns through pure bond funds and low-risk financial productsWang Ming, for example, is taking the initiative to explore potential bond fund investments, despite acknowledging an elevated level of risk compared to traditional money market funds.

As of December, bond markets have experienced a fluctuating revivalAs per the China Bond Information Network, yields for ten-year government bonds slumped below the 2% threshold around December 2 and have been steadily decreasing, recently touching 1.7245%. The Zhongzheng Comprehensive Bond Index reached a peak of 239.99 points, marking a resurgence for numerous pure bond funds that previously suffered losses due to fluctuations between stocks and bonds.

While some investors like Wang are pivoting towards these opportunities, others like Huang Ya are reallocating idle capital into lower-risk wealth management products, targeting expected yields around 2.5%. Even though these products do not offer the same level of flexibility as money market funds, they stand to provide slight enhancements in yield.

In conversations held with a client manager from a state-owned bank in Shenzhen, it became evident that an increasing number of clients have opted to realign their investment strategies towards financial products in light of the declining yields of money market funds