Shenwan Fixed Income · Weekly Focus | Core Contradictions Shift + Asset Allocation Balance Continues, Reduce Duration to Guard Against Headwinds

Spring Strategy

1

Switching Core Contradictions + Continuing Asset Allocation Balance, Reducing Duration to Prevent Headwinds

Spring Strategy

2026.3.16

Analysis of recent trends since Q4 2025: The bond market experienced a “panic sell-off” amid redemption shocks, followed by a rebound driven by allocation cycles after overselling, then a pullback due to policy and inflation expectations trading.

In 2026, the economy is in an “atypical recovery” window. The 2025 outlook was driven by external demand, while 2026 may be driven by domestic demand. The bond market should focus more on nominal growth, fiscal structure, and price rebound, as interest rates enter a phase of “low rates + high volatility.”

Under the game between inflation and stagflation, the key to monetary and fiscal coordination points to a steepening yield curve. The variables influencing institutional bond buying behavior remain in insurance. Whether inflation exceeds expectations still needs attention, and bond market pressure has not been fully released.

Switching core contradictions and continuing asset allocation balance. The transition window for bonds to shift to a “sell on every rise” phase is approaching; strategy should remain cautious about long-duration assets.

2

From Lower Duration to Controlled Duration, From Defense to Offense

Spring Strategy

2026.3.16

Switching core contradictions and maintaining asset allocation balance continue to push bonds toward the “sell on every rise” window, with the yield curve steepening.

Changes in supply and demand will still impact credit bond performance, especially in Q2, with a focus on potential demand increments. Since the start of the year, credit bond supply has been weak, demand has strengthened, driving strong performance.

Curve steepening correction continues, with credit bonds generally having shorter durations and still holding advantages as coupon assets. After entering Q2, credit bond allocation tends to seasonally strengthen, and the current wide credit spreads are relatively manageable.

Strategy shifts from lowering duration to controlling duration, gradually moving from defense to offense. Given the structural features of credit bonds and potential demand increments in Q2, actively seize opportunities in April-May, but remain restrained on duration.

3

Clear Main Line, Past Impact, Positioning for Victory

Spring Strategy

2026.3.16

From a medium-term perspective, the three “unchanged” features of the convertible bond market remain the main trend. First, the overall convertible bond market still shows rotation weakness. Second, the elasticity of convertibles continues to concentrate in high-priced, new, and non-redeemable types. Meanwhile, although new issuance has gradually increased, the stock of existing bonds shrinks, and demand growth outpaces supply, so prices and valuations remain supported.

In the short term, focus on individual bond opportunities during volatility; maintaining position is key. During short-term fluctuations, prioritize position management and structural opportunities at the individual bond level. Primary bond funds can focus on absolute gains from low-priced old bonds; secondary bond funds can allocate low-priced convertibles to enhance portfolio flexibility; convertible bond funds can use convertibles in the core holdings for equal-weight enhancement and tactical trading.

Weekly Review

1

30Y Treasury spread narrows sharply, upcoming supply increases significantly

Weekly Review - Local Government Bonds

2026.3.17

This period, local government bond issuance and net financing both declined month-over-month, with expectations of increases next period. Compared to the same period in 2024 and 2025, this year’s new special bond issuance is faster. In March 2026, the total planned issuance is 9,731 billion yuan, including 3,396 billion yuan of new special bonds. A special new issuance of 125 billion yuan was issued this period, with 82 billion yuan for replacing hidden debt and 0 billion for debt repayment. The spread between 10Y and 30Y local bonds and government bonds narrowed by 10 basis points, with weekly turnover rate dropping sharply.

The cost-effectiveness of 10Y+ local bonds has declined; short-term, attention should be paid to potential pressure from supply rebound on spreads. The 30Y local bond vs. government bond spread has narrowed to 14.35 basis points, indicating reduced spread protection. Next period, local bond issuance and net financing are expected to rebound, which may exert some pressure on market sentiment and spread trends. Using 10-year local bonds as a benchmark, since 2018, the top of the spread adjustment has been around 20-25 basis points above the issuance spread lower limit, and the bottom near the lower limit; currently, the top is around 30-35 basis points, and the bottom around 5-10 basis points.

2

Valuation compression spreads widely, convertible bonds show “negative convexity”

Weekly Review - Convertible Bonds

2026.3.14

Recently, convertibles exhibit a “negative convexity” feature, meaning they tend to follow the market down but not up, with returns and drawdowns clearly underperforming stocks. The valuation compression began after the first week post-Lunar New Year, despite the equity market performing relatively well, structural shifts are evident: tech sectors underperform, and non-redeemable convertibles are generally entering a second redemption cycle. Although stocks performed decently, high-premium and new issues saw valuation compression amid poor outlook expectations.

Subsequently, shocks from US-Iran tensions and soaring crude oil prices have dampened global risk appetite, domestic equity markets weakened, and valuation compression in convertibles has spread broadly. From a rolling perspective, the premium level has returned near +1 standard deviation, significantly lower than previous highs. In the short term, valuations are at a stage low, and under the expectation of a slow bull market in equities, convertibles now show some value, and opportunities in individual bonds with attractive valuations can be actively explored.

3

Interest rate bond funds’ duration declines, trading leverage decreases

Weekly Review - Institutional Actions

2026.3.14

Based on quantitative models, the median duration (excluding leverage) of medium- and long-term pure bond funds decreased this week, with reduced standard deviation. As of 2026/03/13, the median duration of all medium- and long-term pure bond funds over 5DMA is 2.69 years, down 0.03 years week-over-week, at the 77.80% percentile over the past three years. Duration standard deviation 5DMA is 1.75, down 0.01, at the 79.40% percentile.

For interest rate-oriented pure bond funds, median duration 5DMA is 2.92 years, down 0.12 years, at the 53.40% percentile; duration std dev 5DMA is 2.31, down 0.09, at the 82.70% percentile. For credit-oriented pure bond funds, median duration 5DMA is 2.56 years, up 0.02 years, at the 82.90% percentile; std dev 5DMA is 1.36, up 0.10, at the 78.00% percentile.

4

Year-end report season begins, watch for month-end redemption pressures

Weekly Review - Public REITs

2026.3.14

The 14th Five-Year Plan emphasizes actively promoting the regular issuance of infrastructure REITs. This week, the REITs market was weak with declining trading volume, but data center REITs rebounded sharply. Two REITs under China Merchants Shekou released annual reports: the leasing housing REIT performed steadily, with a payout ratio of 102.7%; the industrial park REIT underperformed, with a payout ratio down 14.8%. Since most operational data are disclosed in quarterly reports, annual reports mainly focus on changes in fund holder structure; both products saw increased institutional holdings compared to 2024.

Additionally, the State Power Investment New Energy REIT and Shanghai Rental Housing REIT will have some units unlocked on March 29 and 31, respectively. Based on the March 13 closing price, the estimated unlocking scales are about 20.9 billion yuan (24.7% of the project’s total market value) and 6.45 billion yuan (36%), which could exert potential selling pressure due to increased circulating shares. Moreover, March 28-31 is the concentrated disclosure window for REIT annual reports, which may intensify month-end price volatility; proactive liquidity management is recommended.

5

Production continues seasonal warming, personnel flow slightly declines

Weekly Review - High-Frequency Economic Weekly

2026.3.15

Production shows signs of recovery. From upstream, asphalt plant utilization rate decreased by 0.30 percentage points to 23.00%; blast furnace utilization increased by 0.67 percentage points to 78.36%; crude steel output decreased by 0.10%. From the real estate chain, rebar utilization rate increased by 2.62 percentage points to 38.38%; float glass utilization rate decreased by 0.10 percentage points to 71.42%; mill operation rate decreased by 1.94 percentage points to 14.62%.

Personnel mobility slightly declines, freight prices slightly rise. The nationwide migration index 7DMA decreased by 14.30% week-over-week; domestic flight departures 7DMA decreased by 7.34%; international flight departures 7DMA decreased by 4.63%. In cities like Shanghai, Shenzhen, and Guangzhou, subway passenger volume increased week-over-week, while Beijing’s subway volume declined. Freight volume, measured by the road logistics freight index 4WMA, increased by 0.03% week-over-week, slightly higher than the same period last year.

6

Yields dip short-term, long-term rise; credit spreads mostly widen except for 1Y

Weekly Review - Credit Weekly

2026.3.15

In March, credit spreads may fluctuate weakly, but the risk of significant widening remains relatively controlled. The switch in core contradictions and continued asset allocation balance point to a transition in bonds toward a “sell on every rise” phase. Over the next 3-5 months, focus on asset rebalancing driven by price rebounds and nominal growth recovery; cuts in RRR and interest rate cuts are unlikely to drive rates lower unilaterally, and the curve may continue to steepen. For credit bonds, seasonal patterns show that in March, due to factors like the Two Sessions and wealth management redemption, credit spreads typically underperform rates, and spreads tend to widen.

Given that current spreads are still relatively low historically, the valuation of credit bonds may not be highly attractive. However, in Q2, credit bond allocation tends to seasonally strengthen, and the risk of spreads widening significantly is manageable; thus, March may see some volatility with spreads slightly widening.

Special Topics

1

From Risk Recognition to Value Extraction: Investment Strategies for SME Bank Tier-2 Bonds

In-depth Study

2026.3.16

SME banks are gradually becoming the main net suppliers of Tier-2 bonds, with increasing market attention on redemption pressures and non-redemption risks. Against the backdrop of overall net supply shrinking and state-owned banks’ reduced capital replenishment needs, the share of SME bank net supply has risen significantly.

While overall maturity pressure is manageable this year, structural risks for weaker SME banks require close attention. As of March 2026, the outstanding Tier-2 bonds maturing within the year amount to about 1.09 trillion yuan, with manageable overall pressure; however, AA- and below-rated bonds from weaker banks will peak in redemption in Q2, and some banks may see capital adequacy fall below regulatory thresholds after redemption.

Strategy-wise, consider moderate exposure at the medium-short end, focusing on merger, restructuring, and special bond injection opportunities. Focus on SME Tier-2 bonds with medium-short durations, implied AA/AA- ratings, and debt service capacity above B grade, while seizing valuation recovery opportunities from mergers and special bond injections.

2

Repositioning and Reanalysis of Convertible Bond Funds — Fixed Income Enhancement Product Series Report 1

In-depth Study

2026.3.16

Convertible bond funds mainly fall into two categories: thematic convertible bond funds and high-conversion ratio funds. Some funds not explicitly labeled as “convertible bond” funds have high convertible bond allocations over the long term, thus exhibiting strong convertible bond characteristics.

The scale of convertible bond thematic funds has remained below 100 billion yuan, with growth slowing after 2022; two convertible bond ETFs have gained significant market share. As of Q4 2025, active convertible bond funds and the two ETFs are roughly comparable in size; based on growth trends, by March 2026, the ETFs likely surpassed active funds.

Long-term, the excess return of convertible bond funds is not significant, and their 15-20% equity exposure limits downside control. While some phase gains are possible, long-term performance and maximum drawdown are not superior.

Trend-wise, convertible bond funds are gradually reducing dependence on stocks and strengthening their “convertible bond theme” label. Since 2023, the proportion of funds involved in stock investments has declined, while those with high convertible bond allocations have increased, moving toward pure convertible bond products.

Data Highlights

1

Fiscal Policy Accelerates, Economy Fully Rebounds

In-depth Study

2026.3.16

Economic indicators for January-February 2026 exceeded expectations. Following the nominal economy stabilization in Q3 2025, proactive fiscal measures further support a comprehensive economic rebound. The data for January-February 2026 confirm the recovery, with fiscal policy playing a key supporting role.

Looking ahead, bond market corrections are not necessarily driven by policy rate hikes. Factors such as accelerated fundamental recovery, asset valuation disturbances, and inflation exceeding expectations may cause rapid corrections even without monetary policy turning. Overall, cautious stance on long-duration and ultra-long-duration assets remains prudent, with focus on medium-short duration credit bonds and higher certainty coupon strategies.

2

Fiscal Expansion Continues to Improve Corporate Lending, Duration Assets Under Pressure

In-depth Study

2026.3.15

February financial data show stable total volume and improved structure. First, corporate credit supports increased social financing, while household credit remains weak. Second, household deposits increased YoY, while corporate and non-bank deposits declined YoY. Third, as corporate credit improves, the loan-deposit growth gap widens, likely to persist with policy effects. Fourth, M1 growth accelerates, and the M1-M2 gap improves.

Strategy remains cautious on long-duration and ultra-long-duration assets, emphasizing medium-short duration credit bonds and higher certainty coupon strategies.

Conference Calls

1

Bond Special Session — 2026 Online Spring Strategy Conference

Conference Call

2026.3.17

2

Fixed Income “Shen” Voice: Weekly Market Outlook

Conference Call

2026.3.16

3

How to Understand the Current Convertible Bond Market?

Conference Call

2026.3.19