Notes on "Why Are Excess Returns on China's Treasury Bonds So Predictable? The Role of the Monetary System" (by Fan, L. ; Tian, S. ; Zhang, C.)

Why Are Excess Returns on China's Treasury Bonds So Predictable? The Role of the Monetary System
by Fan, L. ; Tian, S. ; Zhang, C

one quarter ahead excess returns on China’s Treasury bonds with maturities of one to 5 years are highly predictable by a group of pre-determined variables

High predictability of bond excess returns suggests that investors can get a higher return on average by taking an active trading strategy

a monetary system can significantly influence the return dynamics in the bond markets in transitional economies such as China

to improve market efficiency, although the PBC still sets the official rates for nominal and real economic targets, it could take into account more the expectation for future interest rates and economic situations.

when the interest rates are expected to rise in the near future, current term structure of the official rates might be set with a larger positive slope; and when the future interest rates are expected to decrease, the term structure of current official rates might be set to be flat or even inverted.