In recent months, the allure of USD-denominated financial products has captured the attention of many investorsThe anticipated return on such investments has surged, with rates commonly exceeding 4%, and even approaching 5% in some casesWhen juxtaposed with the markedly lower rate of 1.38% on deposits held in major banks for a year, the 3% differential presents a compelling case for those considering entering the USD financial product marketDespite fluctuations in exchange rates, this considerable spread of interest rates serves as a strong incentive for investors.

The rising enthusiasm for USD financial products has coincided with expectations that the Federal Reserve might initiate a cycle of interest rate cutsAccording to data from Puyish Standards, as of December 6, the total value of outstanding USD financial products reached an impressive 280.2 billion yuan (or approximately 40 billion USD), indicating an increase of 55.6 billion yuan since the end of June

This reflects a growing trend among investors who are keen to tap into the higher returns associated with USD-denominated products.

As December unfolds, financial institutions have been swift to respond to the demand for new product offeringsNumerous banks are intensifying their efforts to launch new USD financial products, suggesting that the appetite for these investments remains robust.

For instance, on December 5, BOC Wealth Management unveiled a fixed-income USD product with an investment term of 96 days, promising an expected return benchmarked between 3.9% and 4.7%. Similarly, Agricultural Bank's Wealth Management issued a USD Qualified Domestic Institutional Investor (QDII) product, with a duration of 1 to 3 years, an expected return benchmark of 3% to 4%, and an investment focus based on Chinese dollar-denominated bonds, time deposits, and similar assets.

The sheer volume of new USD products is staggering

• Fighting for Capital in a Falling Rate Environment
• Fallen Giants Struggle to Rebound
• Gold: Awaiting Its Moment!
• Growth of Supply Chain Finance Continues
• Japan Sells $5.9B in U.S. Bonds, Making Market Moves Again

Within just one year, over 1,600 financial products containing the term “USD” have been introduced, with 449 of these launched in the last three months alone, according to Wind dataThe rapid increase in the number of available USD-denominated financial products highlights both the urgent demand from investors and the proactive nature of financial institutions to meet this demand.

What is driving this dual surge in both issuance and purchase of USD financial products amidst a Federal Reserve interest rate cut cycle? One contributing factor can be linked to the prevailing interest rate differentials in the marketA financial analyst from one of the banking subsidiaries mentioned that while the expected yields on USD deposits have decreased due to anticipated rate cuts, the existing differential with completely illiquid CNY deposit rates still persists due to their own rounds of diminishing yields.

In a comparative analysis, the USD fixed-income product benchmark from their bank currently hovers around 4%, contrasting sharply with the sub-2% performance benchmark associated with similarly rated RMB products

Such disparities promote continued interest in USD-denominated products.

Moreover, a strategic addition to product portfolios includes enhanced exposure to US Treasury securities, which presents opportunities for additional yieldThe inverse relationship between bond prices and yields implies that Federal Reserve rate cuts may lead to declining bond yields and rising pricesThis dynamic presents avenues for profit amidst the backdrop of potentially decreasing interest rates.

Recent trends indicate that fixed-income products have transitioned to the forefront of new USD financial offeringsThe recent data suggests that the majority of the 449 new products belonging to this category are primarily composed of pure fixed-income or hybrid fixed-income securitiesWhile most investments initially directed toward USD deposits and certificates of deposit, many have evolved to include a portion of US Treasury bonds, interest rate bonds, and corporate bonds, effectively bolstering potential returns.

However, the decision to integrate US Treasury bonds into these portfolios introduces an element of unpredictability

Upon examination, since mid-September, yields on 10-year US Treasury bonds have exhibited volatility, rising from a low of 3.6% to above 4.4%, indicating a substantial uptick exceeding 80 basis pointsThis trend poses potential challenges for USD financial product returnsYet, market observers hold that the low allocation of these investments in US Treasury debt mitigates the overall impact significantlyBy late November, Treasury yields began their descent, stabilizing around 4.15%.

Another essential factor contributing to the interest in USD financial products is the growing demand for secure investments given the increasing uncertainty of the global economic environmentA bank client manager mentioned that over recent years, investors have shown heightened demand for secure assets; USD-denominated assets, with their haven status and substantial global liquidity, have become a preferred choice for many

Accordingly, banks have adapted by creating offerings that align with these shifting investment trends.

Nonetheless, despite the appealing prospects presented by USD financial products, caution is warranted concerning the potential forex risks that accompany these investmentsPuyish Standards reports that over the past three years, the issuance of pure USD fixed-income products has surpassed 30 billion USD, demonstrating a consistent annual increaseThe question remains whether investors can still enter the market at this stage, but experts are divided on the outlook.

A financial analyst noted that amidst a Federal Reserve rate-cut cycle, returns on US Treasury debt will likely continue to soften, where rising prices from Treasury securities could realize capital gainsHowever, this presents a two-sided coin, as the performance and benchmarks of new USD financial products may trend lower in the future, ultimately affecting the issuance timeline for such offerings.

Compounding the complexities, narrowing interest rate differentials between China and the US may invite foreign exchange risks that could potentially lead to losses for USD financial product investors

In a recent report, it was underlined that the impressive performance of USD fixed-income products has primarily stemmed from the Federal Reserve’s monetary policy, the trajectory of economic recovery, and the liquidity available in global marketsNevertheless, the intricacies of the global economy—including interest rate hikes, geopolitical risks, and possible market adjustments—could impede future returns of USD-denominated products.

Indeed, some institutions are registering critical signals indicating a potential inflection point for USD financial productsCitic Construction Investment recently released a report highlighting three factors worth monitoring: a decline in the issuance of USD financial products post the September peak, a decrease in product benchmarks from their July highs, and a rise in the risk indices of these products observed since August.

It’s essential for prospective investors to approach the USD financial products landscape with a discerning eye, focusing beyond the attractive nominal rates on offer to consider underlying risks

The predominant concern remains interest rate risks, where rising interest rates can diminish the value of fixed-income assets, adversely influencing overall returnsFurther, careful attention must be paid to risks associated with currency exchange and credit.

In the long run, fluctuations in currency exchange rates are expected to increase, directly impacting the actual returns on USD depositsHistorical reference indicates that during previous Federal Reserve rate cut cycles, the USD index has frequently weakened, compounding any benefit that might stem from holding USD-denominated assetsThe outcome of the November FOMC meeting solidified the confidence of Federal Reserve officials regarding the easing inflation and robust labor market, setting the stage for further anticipated rate cuts in December, potentially by an additional 25 basis points.

Ultimately, as the Federal Reserve embarks on this new chapter of interest rate cuts, investors must remain vigilant, judging products by their prospective returns while taking into account the unique dynamics of currency exchange that could influence their investment outcomes