Recently, bearish sentiment has emerged in the bond market. Many industry insiders attribute this partly to regulatory moves targeting the "money market fund enhancement" model.

On November 24, the latest "Institutional Regulatory Bulletin" was officially released, specifying detailed timelines for subscription fund settlement to improve efficiency and reduce processing delays. The industry widely views this adjustment in fund sales settlement mechanisms as closing a loophole that allowed arbitrage through "money market fund enhancement" strategies, while also directly constraining certain wealth management products' long-standing practice of boosting returns through interest subsidies.

The new rules are expected to significantly enhance capital utilization efficiency, reduce opportunity costs from idle funds, and better protect investor interests. However, institutions relying on the previous arbitrage model may face short-term pressure to adjust product returns and reassess strategy sustainability.

This development, coupled with unusual movements in certain property bonds, has contributed to rising yields across multiple bond maturities recently. The yield on the active 10-year government bond climbed from a low of 1.81% on Monday (24th) to a peak of 1.85% on Wednesday (26th), with an intraday increase of about 3 basis points that day. As of Thursday (27th), the yield hovered around 1.84%.

The "money market fund enhancement" strategy exploits timing differences in fund settlement. Typically, when investors purchase money market funds directly from fund companies, the funds are confirmed and invested on T+1, with investors earning returns accordingly. However, under previous rules, when wealth management companies bought money market funds through distributors on T-day, the funds would remain in the distributor's custody account until T+2. In extreme cases, such as purchases made on Thursday, funds might not reach the fund account until the following Monday, staying idle for up to four days.

Under the "Thursday purchase, following Wednesday redemption" model, while funds were actually in the money market fund account for only three days, investors received returns for six days due to T+0 confirmation promises. The additional returns were effectively subsidized by other fund investors.

Industry sources indicate that distributors typically provided an extra 0.6%-0.8% annualized return on money market funds. For a four-day holding period, this could boost annualized returns by 30-40 basis points - a significant enhancement for such products.

The new rules require fund managers to send confirmation and settlement data to distributors by 10:00 on the confirmation day, with distributors completing fund transfers to the registration account by 16:00 the same day. This eliminates the previous timing gap that allowed the enhancement strategy.

Market participants note that third-party distributors, which previously dominated this business, will be most affected. While securities firms' asset management arms continue similar operations using money market fund enhancement products with their own interest subsidies, the main arbitrage channel has been effectively closed.

Data shows banks' investments in public funds have been growing. By Q3 2025, wealth management products held 34.33 trillion yuan in assets, with public fund allocations rising to 3.9% from 2.9% at end-2024.

While the CNEX Bond Divergence Index shows funds driving recent bond market selling pressure, multiple market participants describe the impact as "relatively limited." A large public fund executive noted the arbitrage-linked wealth management funds were never substantial, though those returns will no longer be available.

Analysts suggest this was always a minor regulatory loophole with limited market impact. More attention should focus on whether regulators introduce further policies governing wealth management product return mechanisms, as stricter rules could significantly affect underlying asset allocations and net value fluctuations.

Looking ahead, if regulations tighten further, wealth management product scale and net value volatility might increase, potentially transmitting effects to the bond market - particularly short-term assets, given this year's overall stability in wealth management products. Monitoring wealth management scale growth and net value stability will be crucial next year.