Quantitative Market Timing: Building a Practical Framework for Interest Rate Bond Investment

I would like to share with you our specific operational approach. We use a comprehensive quantitative model to determine the direction of bond market movements. The quantitative framework has two advantages. First, we believe that timing is becoming increasingly important in the bond market. As a benchmark for the interest rate bond market, we typically start with the 10-year government bond. Since 2018, the 10-year government bond ETF (511260) has achieved positive returns every year, because bond assets inherently have fixed coupons and interest payments.

Therefore, there is a long-term upward trend. But investors with some knowledge of interest rate bonds know that they are also influenced by macroeconomics, policies, market sentiment, and other factors. In reality, there are multiple reasons on both sides—bullish and bearish—and how to track and measure which is stronger? Relying solely on subjective analysis can easily lead to biased or unreliable judgments. The quantitative model, on the other hand, is a rational and reproducible timing system. For conservative investors, we also develop rotation strategies between 10-year government bonds and short-term short-term financing bonds based on interest rate timing models.

When we are temporarily bearish on the 10-year government bonds, we switch to more stable short-term financing bonds. The effectiveness is shown here: we find that this strategy can significantly reduce annual volatility and drawdowns while effectively outperforming a buy-and-hold approach of the 10-year government bond. So how does this interest rate timing model work? Guided by the principle of “teaching a man to fish rather than giving him fish,” we share the entire timing framework. This framework can be summarized as two levels and three time dimensions: the two levels are expectations and reality; the three dimensions are long-term, medium-term, and short-term.

In reviewing history, we find that interest rate bonds are affected by both economic reality and economic expectations. Because the bond market has a large allocation of holdings—especially among banks—these institutions often compare bond yields with loan yields, which are closely tied to current economic conditions. This causes the bond market to pay close attention to economic reality. At the same time, long-term bonds like the 10-year government bond are also influenced by future economic expectations, so interest rate bonds are affected by both current reality and future outlooks. In contrast, the stock market tends to be more driven by expectations, with a weaker correlation to current economic conditions.

Having discussed the two levels, next we talk about the three dimensions. Specifically, we believe that in analysis, the long-term should focus on fundamentals, the medium-term on policy, and the short-term on technical signals and institutional behavior. Fundamentals are mainly influenced by inflation and economic growth. We use the OECD’s comprehensive economic indicator for China to represent overall economic health. We find that in a strong fundamental environment—when growth or activity is vigorous—interest rates tend to rise, exerting downward pressure on bond prices. On the policy side, central banks influence long-term rates by adjusting short-term interest rates. From this chart, we see that when the central bank guides short-term bank rates downward—implementing monetary easing—the long end, such as the 10-year government bond, can also perform well.

Finally, since bonds are tradable assets and derivatives like government bond futures exist, technical signals from trading can also help us gauge market sentiment, views, and risk appetite. I will now break down the three analysis dimensions—long, medium, and short-term—and briefly explain each.

Fundamentals significantly impact interest rates. In our macro outlook for 2026, we discussed this as a result of the invisible hand of the market economy. Usually, there are two concepts of interest rates: nominal and real. The nominal rate is what we see daily—for example, the current yield of the 10-year government bond is about 1.8%. The real interest rate is the nominal rate minus inflation, reflecting the true borrowing cost for businesses and individuals, which is highly correlated with overall economic growth. Economic growth and expected inflation are the two most critical factors influencing interest rates.

The concept of economic growth is complex. It can be driven by current demand from households and firms—such as current consumption and production—or by future confidence, like corporate borrowing for new factories, machinery updates, or residents taking out mortgages. These behaviors essentially bring future cash flows forward, boosting current economic activity. We track these indicators comprehensively.

In backtesting, we also identified some long-term indicators relevant to China’s market environment. Historically, China’s economy has been mainly driven by leverage fueled by future confidence. Core indicators include total social financing, fixed asset investment, and property sales—reflecting leverage in the corporate and household sectors. Government fiscal efforts also influence market expectations of growth, with fiscal deposits serving as additional indicators. These conclusions align with our understanding of China’s economy.

While the market’s self-correcting mechanism is sophisticated, it cannot solve all problems—such as overheating, debt crises, or bubbles—indicators of market failure. Therefore, most countries’ central banks guide interest rates through monetary policy.

China’s monetary policy is shifting from quantity-based to price-based tools. In this framework, the “interest rate corridor” is used to guide rates. This involves setting upper and lower limits for interbank funding rates, with the central bank influencing the benchmark and market rates through policy rates, ensuring financing costs stay within a desired range to achieve policy goals—whether stimulating growth, preventing financial risks, or stabilizing the exchange rate.

We mainly focus on the 7-day reverse repo rate, which reflects the central bank’s policy stance. Changes in this rate—commonly called rate hikes or cuts—are infrequent, usually once or twice a year, limiting statistical analysis. However, we can infer the central bank’s attitude by observing market rates, such as the DR007, which mainly reflects liquidity tightness in the interbank market. DR007 generally hovers near the reverse repo rate, indicating the central bank’s control. If DR007 stays above or below the reverse repo rate for extended periods, it signals market expectations of further rate hikes or cuts.

Finally, we briefly discuss technical indicators based on price and volume. Regardless of fundamentals or policy, all news eventually reflects in market prices. Using technical indicators helps us judge market trends. The core assumption is that, even if we are not the most informed investors, following the results of professional traders can be cost-effective. We identify six categories of volume-price indicators across spot markets, bond futures, and equities: price trends, term spreads, tax spreads, risk asset performance, futures-spot price differences, and institutional behavior. Among these, price trend indicators are the most important and effective, confirming our previous view that bonds have trend characteristics.

Each analysis dimension involves large amounts of data. For example, in macro fundamentals, we consider GDP, PMI, industrial added value, and social financing—each with different importance. Selecting the right data and combining strategies is complex, so I won’t delve into detailed statistical methods here.

However, I want to share some core principles. First, when filtering signals, avoid hindsight bias. For example, a certain indicator may have performed well in recent years, but backtests show it was effective only in the past, not recently. Relying on such signals without understanding their logic is risky. We use rolling windows: each year or each screening only considers historical data up to that point, not future information.

Second, evaluating a strategy’s quality is crucial. We emphasize robustness—many metrics exist, such as annualized excess return, Sharpe ratio, win rate, and payoff ratio. But more important than past performance is whether the signal is stable and effective over the long term. Only long-term consistent signals can guide future investments reliably.

Finally, since we consider expectations and reality across long, medium, and short-term dimensions, we generate diverse signals and strategies. We do not discard fundamental or policy signals just because recent short-term performance is poor. All factors influence the market over the medium to long term; their relative importance shifts over time but does not disappear.

Therefore, we retain signals from all levels and combine them with equal weights to ensure model stability and balance. We also show recent trading records. Since 2025, the market environment has been challenging. We made precise calls—such as early-year market outlooks, mid-year trend assessments, and year-end position adjustments—but also experienced losses, which is normal in investing.

The core value of the 10-year government bond ETF (511260): tracks bonds with remaining maturities of 7–10 years, with transparent holdings and no style drift, low fees; as a benchmark in the bond market, with leading trading volume and liquidity, it is a key indicator for the central bank and institutions, suitable for allocation and trading. Compared to active bond funds, it avoids manager style drift; relative to policy bank bonds, its tax spread has narrowed to historic lows, offering better cost performance; compared to individual bonds, it is more convenient to trade without inquiry or split orders, saving time and effort.

Risk warning:

Investors should fully understand the differences between regular fixed investment plans and lump-sum savings. Regular investment encourages long-term, averaged-cost investing but does not eliminate inherent risks of bond investments or guarantee returns. It is not an equivalent financial product to savings.

Both stock ETFs/LOFs are securities with higher expected risks and returns than hybrid, bond, or money market funds.

Investing in Sci-Tech Innovation Board or ChiNext stocks involves specific risks due to differences in investment targets, market systems, and trading rules. Investors should be aware.

The short-term fluctuations of sectors/funds are provided as auxiliary analysis tools only and do not guarantee fund performance.

References to individual stocks’ short-term performance are for informational purposes only and do not constitute stock recommendations or performance forecasts.

All views are for reference only and do not constitute investment advice or promises. If you wish to purchase related funds, please follow relevant suitability regulations, conduct risk assessments in advance, and choose products matching your risk tolerance. Funds involve risks; invest cautiously.

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