Bond return predictability: Macro factors and machine learning methods

We investigate the impact of macroeconomic variables on bond risk premia prediction via machine learning techniques. Based on Chinese treasury bonds from March 2006 to December 2022, we show that adding macroeconomic factors improves bond return forecasts and generates higher economic benets to investors. This is achieved when the nonlinear relationship between macroeconomic variables and bond returns is modeled via machine learning methods. Furthermore, the importance of macroeconomic determinants changes along the yield curve. Our study sheds new light on the information contained in macroeconomic variables for treasury bond valuation and highlights the importance of utilizing appropriate machine learning methods.