Recently, the issue of urban investment debt has once again attracted attention. Last year's wave of debt resolution led institutions to scramble for urban investment bonds, especially those with a remaining maturity of 1 to 2 years, significantly compressing the spread of urban investment bonds. Subsequently, traders shifted their focus to long-term interest rate bonds, and now the speculation on long-term bonds is under close regulatory scrutiny. Recently, as discussions on "domestic bond replacement of foreign debt" heat up, how the future urban investment bond market will evolve has once again become a focal point. During the "2024 Asset Management Annual Conference," several investment managers from bank wealth management subsidiaries and public funds indicated that although the spread of urban investment bonds has been extremely compressed, offering little cost-effectiveness, institutions still choose to allocate due to the bond supply being far lower than demand, especially for credit bond varieties. Data shows that this year, duration contributed to 60% of the returns, while coupon payments only contributed to 40%. In other words, the returns from holding a 3-year urban investment bond may be far less than those from holding long-term interest rate bonds. In the future, in addition to exploring some varieties that still have spreads, investment managers may still need to appropriately extend the duration to obtain additional returns.

The bond supply is insufficient, and the configuration value of urban investment bonds still exists. In July, the issuance volume of urban investment bonds decreased both month-on-month and year-on-year, and the regional spreads in various provinces were mainly narrowed. Research by CICC shows that, looking at the ratings, the spread of AA- grade narrowed significantly, while other ratings changed little. Under a comparable approach, the spreads of AA Liaoning, AA- Shandong, Guangxi, Shaanxi, Hunan, Yunnan, and Sichuan decreased by more than 5 basis points.

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CICC research indicates that the basic logic of "asset scarcity" is still present. Against the backdrop of guarding against bottom-line risks, the short-term credit risk of urban investment is controllable, and the configuration value still exists, with a lower volatility compared to interest rate bonds and financial bond varieties. It is recommended to still moderately sink to a duration of about 3-5 years as a base position, and to moderately extend the duration of high-quality urban investment. CICC believes that the extension of the debt resolution policy period helps to continue the belief in the rigid payment of urban investment bonds, and it is expected that the pattern of restricted supply will still be maintained in the future. The difficulty of non-standard replacement is expected to improve marginally, and actual implementation and progress may accelerate. However, with the yields and spreads of urban investment bonds already at a low level, the incremental benefits of a series of potential benefits to the market performance of the urban investment sector are limited.

Institutional insiders believe that the attractiveness of urban investment bonds is insufficient, but they have to "grab" them, mainly because of the severe shortage of bond supply. Cheng Hao, Deputy Director of the Fixed Income Department of Fidelity Fund, said at the "2024 Asset Management Annual Conference" that the current long-term bond yields have fallen rapidly to the point where regulators have warned of risks, mainly because the entire credit asset is missing, and some institutions are gambling on long-term bonds because they have internal configuration pressure. According to the institution's statistics, from the end of July last year to the end of July this year, the supply scale of the entire market's credit bonds (excluding financial bonds and interest rate bonds) was 400 billion yuan, but the entire wealth management scale rose by about 3 trillion yuan in the first half of this year, and the bond fund scale rose by 1.5 trillion yuan. "Among them, more than 80 billion yuan is medium and long-term pure bond funds, some of which are allocated to interest rates, but 40 billion to 50 billion yuan of short-term debt was originally allocated to credit bonds. The demand for credit bond allocation is far greater than the supply."

Cheng Hao also said, "Under the premise of preventing and controlling risks in the financial industry, the spread of credit bonds has already fallen significantly to a very low level. To obtain a relatively high return, sometimes it is a necessary choice for funds to chase long-term interest rates. Under the influence of these common forces, interest rates have fallen rapidly."

"The high-grade credit bonds (urban investment bonds) invested in the early stage now have a reduced supply, and the cost-effectiveness has decreased, but the configuration power is still there. We may look for varieties with a rapid increase in supply within a certain period, which may still have a certain cost-effectiveness," said Wu Weisen, General Manager of the Fixed Income Department of Hengfeng Wealth Management.

Now, extending the duration has become a necessary step for institutions to pursue returns. Li Yi, Investment Director of the Fixed Income Department of Shanghai Pudong Development Bank Anxin Fund, said at the forum that according to the breakdown of the coupon contribution and duration contribution of the past two bond bull markets and this year's bull market 2A+ urban investment, in the previous two rounds, the coupon of 2A+ urban investment bonds contributed 60% to the returns, and the duration only contributed 40%. However, this year the situation is the opposite, with duration contributing 60% and coupons only contributing 40%. "The returns from holding a 3-year urban investment bond may be far less than those from holding long-term interest rate bonds. We have also reviewed this year's sinking strategy and duration strategy, and in the end, we found that any sinking strategy has lost to the duration strategy," Li Yi said."Reducing the stock and controlling the increase" remains the main tone of debt resolution.

Since the implementation of a package of debt resolution policies, urban investment bonds have significantly benefited, with financing costs falling to historical lows. Currently, the market is warming up to the expectation that debt resolution policies will further expand their scope or be extended, and attention is also being paid to whether the model of "domestic bond substitution for foreign debt" can be adopted.

Wang Lei, Director of the Corporate Ratings Department at S&P Global Ratings, told reporters from Yicai that since the package of debt resolution policies was introduced last year, the financing environment for urban investment has tightened, and a considerable number of urban investment companies have issued 364-day foreign bonds to alleviate financial pressure.

"Although some companies face financial pressure and need to borrow new money to repay old debts or even to increase new borrowings to solve short-term financial problems, issuing short-term high-interest foreign bonds will increase the total debt scale or increase debt costs, which deviates from the spirit of the current debt resolution. In contrast, domestic bond financing costs are relatively low, and supervision is stricter. If domestic bonds are used to replace foreign bonds, especially to replace 364-day foreign bonds, it is more in line with the current spirit of debt resolution. This financing requires the permission of policy and regulatory authorities, and more examples will be needed in the future to substantiate its effectiveness," said Wang Lei.

Several industry insiders also told reporters that even if the Federal Reserve cuts interest rates in the future, reducing the cost of dollar financing, urban investment companies will mainly focus on medium and long-term financing if they raise funds abroad, and the total amount and use of funds still need to be controlled.

S&P Global Ratings believes that the financial pressure on many regional governments and urban investment companies remains significant, and debt resolution is entering deep waters. "It is not ruled out that on the basis of previous financial debt resolution policies, the scope or conditions will be further relaxed to continue promoting financial debt resolution, including encouraging banks to participate more actively in the resolution of non-standard debt," said Wang Lei. In the future, "reducing the stock and controlling the increase" will still be the general trend.