The bond market has entered a robust bullish phase since 2024, prompting the central bank to pause its purchases of government bonds in a bid to temper the excessesIn this evolving landscape, the appeal for bond ETFs is skyrocketing among investors eager for a stake in this asset class.

Recently, there has been a significant expansion within bond ETFs, with a debut of eight benchmark market-making credit bond ETFs now officially open for subscriptionThe enthusiastic reception from the investing community has led to several instances of early closings for these fund offerings.

Market participants widely agree that the approval and launch of credit bond ETFs enrich the options available for investors looking to engage with credit bonds and secure long-term, stable assetsWhile short-term surges in bond market values may trigger heightened volatility, the overarching trend suggests continued growth in the credit bond arena

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Particularly, mid- to high-grade credit bonds seem poised to retain their attractive positioning in an investor’s portfolio.

This expansion of credit bond ETFs is noteworthyThe debut batch includes eight market-making credit bond ETFs: four tracking the Shanghai benchmark market-making corporate bond index and the other four following the Shenzhen benchmark market-making credit bond index, generating a substantial total fundraising target of 24 billion yuan.

Within days of their launch, many of these credit bond ETFs concluded their fundraising efforts ahead of scheduleFor example, Tianhong Fund announced on January 15 that it would wrap up the fundraising for its Tianhong Shenzhen Benchmark Market-Making Credit Bond Exchange-Traded Fund by January 16, 2025, a departure from the previously set date of January 20, 2025.

Similarly, Dacheng Fund reported an early closure on January 13 for its own corresponding ETF, which was also anticipated to conclude on January 20. Other fund companies such as Southern, Bosera, Haifutong, E Fund, and China Asset Management followed suit, announcing early fundraising closure for their own market-making credit bond ETFs.

The heightened enthusiasm for these benchmark market-making credit bond ETFs amidst a backdrop of market adjustments raises the question: why are investors showing such eagerness?

According to Zhang Lei, the fund manager from Bosera Fund's Fixed Income Investment Division, the current climate sees a rapid decline in interest rate bond yields while the credit bonds are lagging behind, thus pushing credit spreads wider and elevating the value of credit bonds.

Since the start of 2024, interest rates on government bonds have been on a steady decline, with yields for the 10-year government bonds plummeting into the “1” territory

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Data from the China Bond Valuation Center indicated that as of January 15, 2025, the 10-year yield fell by one basis point to 1.63%.

In comparison, credit bonds are spotlighted for their compelling positioningZhang further elaborates that from a supply-demand perspective, 2025 could witness continued value in credit bondsOn the supply side, the backdrop of debt transformation is squeezing new financing for local investment projects, while corporate financing demands remain tepidThe limited supply of non-financial credit bonds is only exacerbated by this issueConversely, insurance companies are likely to increase their bond holdings due to reduced non-standard supply and dwindling deposit demands, while banks, especially smaller ones, are showing greater interest in credit bonds.

In the context of rising allocation demand, the distinct advantages of market-making credit bond ETFs have further stirred investor enthusiasm

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Bai Wenxi, Vice Chairman of the China Enterprise Capital Alliance, highlights that the recently launched benchmark market-making credit bond ETFs have innovatively designed products that benefit from market-making support, thus enhancing liquidity and addressing the developmental challenges of credit bond ETFsThis innovation also facilitates better arbitrage opportunities between primary and secondary markets, stabilizing premiums and discounts while allowing for improved liquidity management.

Wang Yirong, a quantitative researcher at Yingmi Fund Research Institute, echoes this sentiment, asserting that the launch of these products not only supplements effective investment tools for index enthusiasts but also bolsters the liquidity of market-making bonds, thus enhancing the market's price discovery capabilities and invigorating transactions within the exchange bond market.

Zhang further points out that, relative to typical mid- to high-grade credit bonds, the issuance volumes of benchmark market-making bonds are larger and entail higher thresholds, all while boasting superior liquidity.

“Transaction data indicate that the majority of the deep market-making credit bonds exhibit monthly turnover rates above 5%. As the market for exchange-traded corporate bonds continues to grow, the resulting increase in active trading will further expand investment strategy capacity,” Zhang states.

Alongside this improved liquidity, the first set of benchmark market-making credit bond ETFs emphasizes a more robust allocation strategy aimed at stability.

Research reports by Zhongzheng Pengyuan underscore that benchmark market-making credit bond ETFs possess quality underlying assets and enhanced liquidity attributes, positioning them to meet the low-risk investment needs of in-market investors

This ultimately enriches the bond market's capacity to serve the real economy's financing necessities while encouraging prolonged engagement from medium- to long-term investors.

The bond investment team at GF Fund further elaborates that, when juxtaposed against their counterparts, such as the China Bond 1-3 Year AAA Credit Bond Index, the Shenzhen Benchmark Market-Making Credit Bond Index showcases advantages that include greater yields, reduced drawdowns, and superior risk-return ratios.

Data from GF Fund reveals that since the inception of the Shenzhen Benchmark Market-Making Credit Bond Index on June 30, 2022, it reported an increase of 10.51% by December 31, 2024, outperforming the 9% growing rate of the China Bond 1-3 Year AAA Credit Bond Index in the same periodNotably, the maximum drawdown experienced by the former was only 0.97%, while its counterpart faced a maximum of 1.49%.

Bai mentions that investors revere this type of product, especially in the current market climate where their reliable returns and adaptable trading mechanisms have drawn considerable funds.

Wang Yirong shares the perspective that the excitement surrounding the first batch of benchmark market-making credit bond ETFs will not only inspire a ripple effect, encouraging other fund companies to expedite the application of similar products, but simultaneously compel regulators to take into account market resilience and risk factors when determining the issuance pacing for these new products.

As the market readies to embrace these newly launched benchmark market-making credit bond ETFs, investors now possess an even richer toolkit for quality bond asset allocation.

Zhang asserts that the bond ETF market currently exhibits a scarcity of options, particularly among those linked to exchange-traded corporate bonds

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The approval of comparable products is likely to further invigorate the exchange bond landscape, paving the way for diverse investor participation.

Ultimately, the entry of benchmark market-making credit bond ETFs not only diversifies choices for investors looking to delve into credit bond investments but also enhances liquidity levels in the secondary markets for exchange-traded bondsThe active secondary markets might stimulate activity in the primary markets, aiding issuers in cutting down on financing costs and expanding their financing spectrum, thus serving the real economy more effectively.

Guotai Junan emphasizes that with the introduction of the credit bond ETFs, market sentiment regarding high-strategy capacity, low credit risk premium-grade bonds will likely gain tractionIn an environment of low interest rates, the tool's properties will become more pronounced, particularly benefiting state-run enterprises and government securities—potentially leading to enhancements in liquidity and solidifying the importance of high-grade credit bonds.

Nonetheless, market analysts caution that the trajectory of interest rates remains a critical anchor for credit bonds

The ongoing decline in long-term government bond rates could introduce greater fluctuations within the credit bond realm.

By 2025, the credit bond market may witness a new dynamic: credit spreads might display a tendency to oscillate while maintaining strength, with quality credit bond characteristics reinforcing their rate-driven appealIn this fluctuating yet buoyant environment, investment strategies focusing primarily on yields, complemented by secondary rounds, will emerge.

All things considered, amid an "asset scarcity" backdrop, the enduring vibrations in the market do not quell investors' desires for credit bond allocationsAccording to Guolian Securities, the investment landscape for credit bonds in 2025 remains favorableHere, monetary policies are likely to shift from "stable" to "moderately accommodative," with predictions suggesting the foundational rate and capital rate could drop significantly further compared to 2025, leaving room for continued contractions in credit spreads.

Zhang points out that in recent years, the expansion of exchange-traded bonds has created ample opportunities for the growth of bond ETFs

As acceptance of bond ETFs among investors slowly increases, the importance of these tools in comprehensive asset allocations is becoming more recognized“Looking at the scenario in 2025, the growth in bond ETF scales is expected to markedly outpace that of bond index fundsBesides traditional institutional clients, individual investors are gradually becoming aware of and investing in bond ETFs,” he explains.

Since 2025, the rapid expansion of bond ETFs has been evidentZhang notes that as a crucial instrument for diversifying asset allocations, bond ETFs present an encouraging future trajectory for several reasons: firstly, the bond index fund market maintains a relatively limited share (hovering around 10%), showcasing substantial growth potential compared to developed markets; secondly, the evolution of credit bond index funds has lagged, with limited availability; thirdly, the decline in long-term government bond yields places constraints on gaining excess returns through active management, reinforcing the appeal of index funds in terms of fees and functionality; lastly, bond ETFs hold advantages over typical bond index funds in terms of trading flexibility and ease of collateralization.

Wang Yirong also reiterates that from a medium- to long-term perspective, as recognition and acceptance of bond ETFs rise amidst a persistent demand for reliable yield products, the road ahead remains rich with possibilities, delivering investors an expanded inventory of attractive and convenient investment solutions.

However, Zhang emphasizes that despite a robust demand for bond ETFs in the market, hurdles exist pertaining to investment and transaction mechanisms, notably inadequate liquidity in the in-market bonds, delayed development of market-making mechanisms, and less participation from certain institutions, like banks’ own funds.

“Currently, the exchange bond market is progressing in enhancing and expanding its framework