Personal Finance (5): Bonds and Fixed Income — The Stable Half of Your Portfolio

For years I put money in a bond fund and moved on. Then one morning in November 2022 my “safe” fund was down 2.5% in a week, and I realized I had no idea what I actually owned. Here’s what I learned.

You are the bank now#

A bond is an IOU. You lend money to a government, a local authority, or a company; they pay you interest periodically (the coupon) and return your principal on a fixed date (the maturity). Stock buyers own a slice of the company; bond buyers are creditors — no upside if the company triples, but you get paid before shareholders if it fails. That’s why portfolios hold both: different seats, and historically they don’t always move together.

Four concepts that tripped me up#

Coupon rate is the fixed rate printed on the bond. A 100-yuan face value bond with a 3% coupon pays 3 yuan a year, forever, no matter what.

Current yield is coupon divided by the current market price. If that bond now trades at 95, current yield is 3/95 = 3.16% — same 3 yuan of income, but you paid less for it.

Yield to maturity (YTM) is the total annualized return if you hold to maturity, counting coupons, your purchase price, and the 100 yuan you get back at the end. This is the number professionals compare. When the news says “10-year government bond yield at 2.3%,” that’s YTM.

Credit risk is the chance you don’t get paid back. Lend to the central government and it’s near zero — it can tax or print. Lend to a small company and default is real. Rating agencies (China Chengxin, China Lianhe, Dagong; internationally Moody’s, S&P, Fitch) grade it: AAA highest, then AA, A, BBB, and below BBB is “junk.” The rule is simple — lower credit, higher yield. That extra yield is the credit spread, your pay for taking default risk.

Why prices fall when rates rise#

This is the counterintuitive part. Rates go up — shouldn’t a bondholder be happy? No.

Say you buy a 10-year bond today paying a 3% coupon: 3 yuan a year on 100 yuan face value. Tomorrow the central bank hikes, and newly issued bonds pay 4% (4 yuan a year). Your bond is locked at 3 yuan. Who buys your 3-yuan-a-year bond when a fresh one pays 4? Nobody — unless you cut the price. Roughly, the price has to fall to about 3/4 × 100 ≈ 75 so that a buyer’s 3 yuan of income equals a 4% yield on what they paid. Your coupon never changed; your resale value dropped by a quarter.

The relationship is a mathematical identity, not a tendency:

$P$ is price, $C$ the coupon, $F$ the face value, $r$ the market yield, $n$ the number of periods. Push $r$ up and every term shrinks. Price falls.

The key implication: hold to maturity and price swings don’t matter — you get your coupons and principal back regardless. But sell early, or hold a bond fund (which never matures, because the manager constantly rolls positions), and rate moves hit your returns directly.

Duration: how hard rate moves hit you#

Duration measures that sensitivity. Roughly, it’s the percentage price change for a 1-percentage-point change in yield. A duration of 7 means a 1-point rise in yields drops the price about 7%, and a 1-point fall lifts it about 7%. When you buy a bond fund, its average duration tells you how bumpy the ride will be:

Same asset class, very different experiences. (Modified and effective duration refine this for compounding and callable bonds; the intuition is what matters: longer duration = bigger swings.)

Types of bonds in China#

China’s bond market is the world’s second largest. Ranked by credit risk, lowest to highest:

Government bonds are the safest — full central-government backing, tax-exempt coupons, and the benchmark all other Chinese bonds price against. There are also non-tradable savings bonds sold through banks: basically a government-backed time deposit at a slightly better rate.

Corporate bonds are where yield — and risk — climbs. Spreads run from ~50 bps for a AAA state-owned enterprise to 300+ bps for a lower-rated private firm. The 2021–2022 real estate developer defaults taught the market that “too big to fail” doesn’t always hold.

Convertible bonds are the interesting hybrid: a corporate bond that can convert into the issuer’s shares at a set price, giving you a bond floor plus equity upside. Genuinely worth knowing, but the conversion price, call provisions, and eroding floor make it a second-year topic, not a starting point.

Bond funds vs. individual bonds#

Unless you have serious capital (500,000+ yuan) and want to learn trading mechanics, buy bond funds, not individual bonds:

• Diversification. One default can wipe out years of coupon income; a fund holds hundreds of bonds, so one default is a small hit.
• Liquidity. Individual corporate bonds can be hard to sell; funds redeem daily.
• Low threshold. Many single bonds require 100,000–1,000,000 yuan; funds start at 1 yuan.
• Managed. Duration, credit analysis, and rolling maturities are handled for you.

The types that matter: pure bond funds hold only bonds — the genuinely stable option. Short-duration ones (under 2 years) run 2–4% annually with 1–2% max drawdown; medium-to-long ones (3–7 years) run 3–5% but can drop 3–5% in a bad year. Primary and secondary mixed bond funds can hold stocks — a secondary fund can be up to 20% equity, which behaves nothing like a pure bond fund. I’ve watched people buy one thinking “bond fund” and panic when it dropped 5% because the stock sleeve got hit. Check the fund’s average duration on its detail page or quarterly report before buying.

My own split: short-duration pure bond funds for the emergency reserve, medium-duration pure bond funds for the fixed-income portion of the portfolio. No mixed funds — I control equity exposure separately.

The November 2022 bond crash#

This taught me more than any textbook. In November 2022, Chinese bond funds — the money everyone parked as “safe” — dropped 1–3% in days. A fund earning 3% a year losing 2% in a week means giving back half a year’s return.

The chain: China relaxed Covid-zero and rolled out real estate support, so the market suddenly priced in recovery, higher inflation, and higher rates. Government bond yields jumped 15–20 bps in days — and per the seesaw, prices fell. Then it turned ugly. Millions of retail investors held bond funds through bank wealth products; seeing “guaranteed” returns go negative, they panicked and redeemed. Managers sold bonds to fund redemptions, pushing prices lower, triggering more redemptions — a textbook liquidity spiral. Even high-quality government bonds fell, because managers had to sell whatever was liquid. Total drawdown for medium-duration funds: 2–3%.

What I took away:

1. “Fixed income” means the coupon is fixed, not the return. Market price still moves.
2. Duration decides how much it hurts. Short-duration funds barely budged; long-duration funds got hammered.
3. Redemption spirals are real in open-ended funds — when everyone runs at once, even sound bonds sell at distressed prices.
4. “Safe” depends on horizon. Bonds are safe over 1–3 years; over 1–3 weeks they can absolutely hurt you.

When to hold bonds#

Which side of the seesaw you want depends on where rates are heading.

Falling rates (usually during slowdowns) lift existing bond prices, and long-duration bonds rise most — the bond bull market. China’s 10-year government bond yield has fallen from around 3.6% in 2018 to about 1.74% as of mid-2026 — a multi-year bond bull, in which long-duration holders earned coupon plus steady price gains as yields dropped. For policy-rate context, the LPR sits at 3.0% (1-year) and 3.5% (5-year and over) as of mid-2026, unchanged for 13 straight months. Rising rates (fighting inflation) do the reverse: prices fall, long duration falls most. The response is simple — shorten duration, give up a little yield for a lot less rate risk.

With the 10-year yield now in historically low territory, whether it has bottomed is genuinely unknowable — more slowdown and deflation argue lower; a working stimulus and returning inflation argue higher. One thing is structural, though: at ~1.74% the coupon you lock in today is far below the 3.6% of 2018, so future bond returns are simply lower, and with rates this low there’s much less room left for cuts to drive further price gains. I don’t have a strong view and neither does anyone else, so I hold a mix of short and medium duration and don’t concentrate in the longest funds.

On stocks and bonds: textbooks call them negatively correlated, the basis of the 60/40 portfolio. In practice it’s messier. In 2008 it held beautifully — stocks crashed, government bonds soared. In 2022 both fell together, because the shared enemy was rising rates. In China the A-share/government-bond correlation swings between negative, zero, and briefly positive. So bonds diversify a stock portfolio most of the time, but won’t save you in every crash — especially the stagflation case (slowing economy plus rising rates) that sinks both at once. Rare, but real.

My current bond allocation#

1. Emergency fund (6 months of expenses): short-duration pure bond fund — accessible, stable, 2–3% yield, tiny drawdown.
2. Fixed income in the portfolio (~30–40% of invested assets): short and medium-duration pure bond funds. No long duration — I’d give up 0.5% of return to skip the volatility.
3. No individual bonds — not enough capital or expertise to diversify; funds do it better.
4. No convertible bonds yet — the equity component adds complexity I’m not ready for.
5. No bank wealth products — after 2022 I learned their “stable return” can evaporate, and the fees are opaque. Direct fund purchases are cheaper and clearer.

What’s next#

That’s both major asset classes covered: equities (Article 4) and fixed income (this one). Knowing the building blocks isn’t the same as assembling them — how much in stocks vs. bonds, how to rebalance, where cash, gold, and REITs fit. The final article, Part 6: Putting It All Together, turns all this theory into an allocation you can actually implement and sleep well with.#

This is Part 5 of the Personal Finance series. Previous: Part 4 — Index Funds and ETFs . Next: Part 6 — From Theory to Practice .