Morgan Stanley Fund has released its bond market outlook for the second half of 2026. The firm is optimistic about the overall bond market performance in the fourth quarter, viewing any declines in the third quarter as strategic entry points. The core rationale centers on the 6 trillion yuan local government debt refinancing bonds: this quota will be spread over three years at 2 trillion yuan annually, with the three-year quota largely exhausted by the end of 2026. By 2027, the supply of ultra-long-term bonds will be significantly scarce.

In 2025, the surge in ultra-long-term bond supply overwhelmed market absorption capacity, leading to persistent weakness in long-term bonds. However, the sharp supply contraction expected in 2027 could create a reverse mirror image of the 2025 market dynamics. Insurance funds and similar institutional investors have rigid demand for long-duration asset allocation. With the continuous reduction of non-standard assets, deployable long-duration standardized assets are becoming scarce. In 2027, insufficient supply of long-term bonds will force insurance funds to increase holdings of existing ultra-long-term bonds in the secondary market, providing sustained support for long-term bond valuations.

From a fundamental perspective, GDP grew 4.3% year-on-year in the second quarter, bringing the first-half cumulative GDP growth to 4.7%. This aligns with the 2025 annual GDP growth target range of 4.5% to 5.0% set during the Two Sessions, with the first-half result of 4.7% sitting within the target midpoint. For the full year, as long as single-quarter GDP growth remains above 4.3% in the second half, the annual average will hold above 4.5%, making it highly likely to achieve the policy bottom-line economic goal. Morgan Stanley Fund judges that the 4.3% GDP growth in Q2 is likely the lowest point for the full year, primarily because the year-on-year base for economic data will be lower in the second half. Even with limited stimulus policies, the readings will naturally rise.

On the policy front, monetary policy will remain broadly accommodative, but the likelihood of broad-based interest rate cuts or reserve requirement ratio (RRR) cuts is low. Morgan Stanley Fund expects no comprehensive RRR or interest rate cuts in Q3. Instead, policy will focus on various structural monetary tools to provide targeted support to the real economy, technology, and infrastructure sectors. Overall liquidity will remain stable without major accommodative stimulus.

Morgan Stanley Fund believes that the economic fundamentals and policy environment together determine the overall asset return midpoint for August through the third quarter: economic growth has a safety net, eliminating the need for strong stimulus, so equity markets lack catalysts for a broad policy-driven rally. Export growth is declining, and only existing fiscal measures are being deployed, leaving the market without a unified theme and prompting funds to engage in wave-based trading. The economy faces no hard-landing risk, and the bond market will not see a sustained, significantly accommodative bull run. Pure bond returns will primarily come from short-term bond coupons, with ultra-long-term bonds only presenting phased recovery opportunities after supply shocks. In a macro environment with weak differentiation and no strong policy stimulus, capital allocation strategies will shift toward balancing volatility control with moderate recovery opportunities.

Regarding fund flows, seasonal capital inflows from wealth management products will suppress bond market capital gains in Q3. Based on historical seasonal patterns: wealth management product inflows in July are second only to April. This April saw 2.8 trillion yuan in new wealth management products, but weekly high-frequency data for July shows inflows significantly below the seasonal levels of previous years. Looking at the five-year average: wealth management products typically see about 200 billion yuan in net additions in August and about 800 billion yuan in net outflows in September. The limited incremental capital from wealth management products in August means a lack of allocation-driven support, while concentrated redemptions in September will lead to sustained capital outflows from the bond market, making it extremely difficult to generate spread gains from pure bonds.

On the supply side, the concentrated issuance of 10-year, 20-year, and 30-year ultra-long-term government bonds in mid-August will pressure long-end rates, weakening ultra-long-term bond prices. This period represents the strongest supply shock of the entire year. By mid-to-late September, when the August ultra-long-term bond issuance is complete, supply pressure will ease. With the full realization of concentrated redemptions from wealth management products in September, ultra-long-term bonds may see a recovery phase.