How to determine whether a sovereign bond is “fairly valued” remains an unresolved question in fixed income research. Traditional term structure models focus on the dynamics of yields but do not address where current yields stand in their own history. This paper proposes a valuation framework for sovereign bonds based on multi-window historical percentiles. The core indicator is the “price percentile” (1 – yield percentile), complemented by the “numerical percentile” of interest rate spreads, forming a two-dimensional valuation system. Exhaustive strategy backtests are conducted on three Chinese government bond ETFs (6,660 combinations) and four U.S. Treasury ETFs (186,000 combinations) using real ETF total return data. This paper proposes and verifies three theoretically innovative core propositions: (1) The “regime wandering” hypothesis of interest rates—interest rates do not possess a stable “equilibrium value” but rather “wander” within wide bands determined by monetary policy regimes. The “fair” valuation zone is rare and transitory across all four major economies examined (China, the U.S., Germany, and Japan); Japan spends over half of its time in the “extremely expensive” state, and Germany’s longest streak lasted 13.5 years. This finding directly challenges the equilibrium rate theory represented by the natural rate hypothesis of Wicksell and the Taylor Rule. (2) The hierarchical structure of institutional interfaces—the launch of Shanghai crude oil futures (SC) “activated” the previously silent pricing function of the China-U.S. yield spread in crude oil (the coefficient changed from insignificant to significant with the correct sign), while the introduction of the Shanghai Gold Benchmark Price (SGE) “enhanced” the stability of the previously sign-unstable physical-demand pricing channel in gold (nested F = 750.27), demonstrating that institutional interfaces can be classified into “activation type” and “enhancement type.” (3) The “Dual-Anchor Regime” theory of global asset pricing—the China-U.S. yield spread is the systematic variable driving the valuation divergence between the two countries’ interest rates (in-sample R² = 0.315; pseudo out-of-sample predictive correlation = 0.963); the sign of the spread serves as the critical threshold for regime switching, and Chinese macro-financial variables acquire independent marginal pricing power under the inverted-spread regime. The exhaustive backtesting results show that valuation percentile signals can systematically improve the risk-return profile of medium- and long-term government bond portfolios, with the optimal strategy paradigm being “extreme reversal + trend filter,” and the full-history window achieves the highest or near-highest Sharpe ratios in both markets; the strict monotonicity between window length and Sharpe ratio rules out overfitting. The lower number of strategy combinations for China (6,660) relative to the U.S. (186,000) arises because Chinese bond ETFs were in a prolonged one-sided rally during the sample period—simple strategies already produced high Sharpe ratios, and the exhaustive testing focused on verifying cross-duration robustness. The U.S. market, having experienced multiple rate cycles and extreme volatility, required finer exhaustive testing on parameters such as volatility filters and position scaling. This difference itself reflects the framework’s adaptability to distinct market regimes. This paper shares the same factor-screening and verification philosophy as Tang (2026)’s dual-anchor commodity pricing model—both employ exhaustive testing to let data automatically select the optimal factor combinations, and both enforce strict statistical constraints to ensure robustness. Tang (2026) discovered on the commodity side that the China-U.S. yield spread is a cross-market pricing factor; this paper reveals on the interest rate side the transmission mechanism of this factor—the China-U.S. yield spread drives the valuation divergence of the two countries’ government bonds, which in turn affects global capital allocation and commodity pricing. This paper challenges or complements several classical theories: it provides new empirical evidence and theoretical boundary conditions for equilibrium rate theory (the “fair” zone is rare, and interest rates do not fluctuate around an equilibrium), factor pricing models (factor weights switch with the macro regime), international monetary system theory (the institutional infrastructure conditions for pricing power), and behavioral finance (the asset-specificity of valuation momentum enhancement).
Tang (Wed,) studied this question.