Core Insights - The report predicts changes in the yield curve using the Nelson-Siegel model, which describes the curve's dynamics through three factors: level, slope, and curvature [3][29]. - An improvement in the model for predicting the level factor has been made by incorporating policy rates, market benchmark rates, slope, and curvature factors, which enhances the predictive accuracy [4][56]. - The duration rotation strategy based on yield curve predictions shows robust performance, consistently outperforming benchmarks and achieving significant excess returns [5][91]. Duration Rotation Strategy - The latest signal from the duration rotation strategy, as of October 31, 2025, indicates a strong preference for long-duration interest rate bonds, with a signal value of 10 [6][96]. - The strategy is designed to capitalize on the natural "risk-return-liquidity" trade-offs present in different maturity bonds, where short-term bonds offer lower duration and volatility but higher reinvestment risk, while long-term bonds provide higher coupon protection but are more exposed to interest rate risk [10][14]. Yield Curve Construction - The report establishes the yield curve using historical spot rate data from 2006 to 2025, showing that the average yield curve is monotonically upward over the entire period [21][22]. - Principal component analysis of historical spot rates reveals three main components that represent the level, slope, and curvature of the yield curve, providing insights into its dynamics [26][41]. Statistical Characteristics of Spot Rates - The statistical characteristics of spot rates indicate that as the maturity increases, the mean yield rises while volatility decreases, with the average yield curve showing a consistent upward trend [21][22]. - The report provides detailed statistics on various maturities, including total returns, annualized returns, annualized volatility, Sharpe ratios, and maximum drawdowns, highlighting the performance of different maturity segments [12][95]. Model Improvements - The report discusses enhancements to the predictive model for the level factor by integrating external variables such as policy rates and market rates, which have shown to improve the direction prediction accuracy [56][62]. - The introduction of additional factors, including slope and curvature, aims to refine predictions during periods of yield curve inversion, thereby increasing the model's robustness [70][75]. Backtesting Results - Backtesting results demonstrate that the improved duration rotation strategy yields a total return of 110.37% over the evaluation period, significantly outperforming various maturity indices and equal-weighted indices [91][95]. - The strategy's maximum drawdown is reported at 5.36%, which is lower than the maximum drawdown of 7.23% for the 7-10 year index, indicating a more stable performance [95].

Core Viewpoint - The essence of duration rotation in the bond market is highlighted, emphasizing the dynamic adjustment strategies based on interest rate cycles, where long bonds act as offensive tools during declining rates and short bonds serve as defensive shields during rising rate risks [4]. Group 1: Bond Market Dynamics - The bond market is a cornerstone of the modern financial system, with its depth and breadth underpinning the stable operation of financial markets [4]. - The core driver of bond price fluctuations is interest rates, which guide capital flows [4]. - Different maturity bonds exhibit a natural trade-off between yield, risk, and liquidity, leading to a "pursuit of profit migration" phenomenon during interest rate cycles [4]. Group 2: Yield Curve Prediction - The Nelson-Siegel model is utilized to fit interest rates of different maturities, focusing on three factors: level, slope, and curvature [5]. - Predicting the yield curve involves forecasting these three factors, which allows for the establishment of expected yield curves and the calculation of expected holding period yields for zero-coupon bonds [5]. Group 3: Model Improvement - Unit root stationarity tests indicate that the level factor is non-stationary but differenced stationary, while the slope and curvature factors are stationary [6]. - An autoregressive model is employed for the slope and curvature factors, with a focus on improving the level factor's modeling [6]. - The improved model enhances the directional prediction success rate for the level factor [7]. Group 4: Duration Rotation Strategy - The constructed duration rotation strategy based on predicted factor values shows significant and robust excess returns [8]. - From June 1, 2009, to October 31, 2025, the strategy achieved an absolute return of 110.37% with an annualized return of 4.63%, outperforming the benchmark's absolute return of 76.62% and annualized return of 3.52% [8]. - The strategy outperformed the benchmark in all years except 2012 [8]. Group 5: Current Strategy Signal - As of October 31, 2025, the latest signal from the duration rotation strategy indicates a recommendation to allocate to long-duration interest rate bonds [9].

Group 1 - The essence of bond duration rotation is the dynamic adjustment strategy based on interest rate expectations, where long bonds act as an "offensive spear" during declining interest rates and short bonds serve as a "defensive shield" during rising interest rate risks [1][15]. - The bond market is a cornerstone of the modern financial system, with its depth and breadth forming the basis for the stable operation of financial markets [1][14]. - The report emphasizes the importance of duration as a core indicator for measuring bond price sensitivity to interest rates, which is crucial for managing interest rate risk [14]. Group 2 - The Nelson-Siegel model is utilized to fit different maturities of interest rates, allowing for the construction of a yield curve based on three factors: level, slope, and curvature [2][32]. - The model's core idea is to predict future changes in the yield curve by forecasting the values of these three factors, which can then be used to determine the optimal duration for bond allocation [2][51]. - The report highlights that the average yield curve is monotonically increasing over the historical period analyzed, indicating a general upward trend in interest rates as maturity increases [23][24]. Group 3 - The report presents a significant improvement in the predictive power of the model for the level factor by incorporating external variables, which enhances the direction prediction success rate [3][56]. - The introduction of slope and curvature factors further improves the model's performance, especially during periods of yield curve inversion [3][4]. - Backtesting results show that the duration rotation strategy achieved an absolute return of 110.37% from June 1, 2009, to October 31, 2025, with an annualized return of 4.63%, outperforming the benchmark [4][18]. Group 4 - The latest signal from the duration rotation strategy indicates a recommendation to allocate to long-duration interest rate bonds as of October 31, 2025 [5]. - The strategy's value lies in enhancing returns through duration mismatching, hedging risks with short bonds, and optimizing the portfolio by dynamically adjusting duration exposure [18][19]. - The report provides a comprehensive framework for the duration rotation strategy, emphasizing the need for precise interest rate predictions to maximize capital gains [19][20].