"Hu'an Gu Shi" Part Four | Zheng Ruxi: Embracing the Spirit of "Deep Cultivation" to Be a Thoughtful Player in the Market

In a low-interest-rate environment, bond assets naturally tend to exhibit increased volatility, declining expected returns, and lower Sharpe ratios. The traditional “steady coupon income” approach may struggle to meet investors’ long-term return expectations. The role of trading in portfolio management has significantly increased.

In the highly competitive A-shares bond market, how can we more effectively generate profits through trading and continuously improve our portfolios to outperform others? I believe: first, it’s essential to stay highly sensitive to market conditions and grasp the future or latest market logic as early as possible; second, we must genuinely maintain respect for the market and become “mindful” participants.

“Understanding, remembering, iterating”—continuously capturing opportunities created by market logic that is temporarily overlooked.

Currently, the bond market offers a rich variety of products, maturities, and rating structures, each with different operational logic. When a particular logic is widely recognized by the market in the short term, it tends to become “crowded.” If we focus excessively on chasing hot topics, although short-term win rates may be high, the low odds can reduce long-term success.

Conversely, logic that the market temporarily neglects may often present profit opportunities in the future. The market operates this way—“learning effects” coexist with forgetfulness. If we can adopt a persistent, in-depth approach—learning from past micro-market operations, gaining experience, and iterating new trading strategies—we increase our chances of gaining a slight edge amid future market fluctuations.

This idea is somewhat similar to AI’s “learning models.” With the advent of AI, various models for predicting market trends have emerged in the fixed income field, many of which have achieved high accuracy during testing. However, I believe that while AI excels at data mining and pattern recognition, the personal intuition of fund managers, cross-cycle experience, and keen insights into unstructured information remain core competitive advantages that algorithms find difficult to replicate.

In a low-interest-rate environment, executing the “big picture” of bond asset rotation.

Investors who have observed interest rate trends over the past few years might feel that current rates are very low, making pure bond funds seem “lame” or “uncreative.” That’s partly true, but not entirely. I agree that the potential downward movement and speed of interest rates will significantly slow, but during this process, changes in fundamentals, liquidity, institutional behavior, and risk appetite will still create many opportunities for rate fluctuations. Besides the chance of unilateral rate movements, curve structure changes are also frequent and even “spectacular.”

Our research team’s historical observations show that approximately every two weeks, significant fluctuations in important spreads (maturity, credit, or specific bond spreads) can occur. This means that even with a neutral duration strategy, if we grasp the curve structure shifts and time our bond rotations well, we can still find ways to generate alpha in a low-rate environment.

Continuously refining the “relative value assessment” concept and method to optimize portfolios and improve Sharpe ratios.

Over ten years ago, when I worked in the fixed income trading department of a securities firm, I initiated cross-asset and spread trading strategies that changed the traditional “relying on luck” approach in fixed income. At that time, we frequently used interest rate swaps, government bond futures, and other instruments to hedge interest rate risk, but we still felt the limitations of available hedging tools. It wasn’t until I had the opportunity to visit and exchange with major Wall Street market makers and proprietary trading firms, which inspired me. These firms could achieve active and effective market making and generate stable intermediate income mainly because they had a broader selection of hedging instruments and a comprehensive “relative value scoring system.” In practice, once a market-making target is traded, the market maker doesn’t need to buy back the same security but can buy a similar one with a higher value score. As a fixed income portfolio manager, I learned that: first, increasing product depth—researching the volatility patterns of all bonds without obvious credit flaws—builds a more solid and detailed “pricing network”; second, establishing a practical, tailored “relative value evaluation system”—which is not just a simple comparison of spreads but a “feasibility analysis of spread reversion” based on market-driven logic and institutional preferences.

Throughout my years in the public fund industry, this “relative value evaluation” approach has continued to assist me and my portfolios. A key feature of pure open-end bond funds is the daily potential for redemption-driven size changes, with uncertain timing of inflows and outflows. My approach is simple: first, regardless of when clients invest, I strive to select the most cost-effective assets available at that moment; second, I aim to maximize the risk-adjusted return of the portfolio daily. If I compare my portfolio to a “big pot,” the assets are like “dishes” inside. I use appropriate “stir-frying” techniques—constant trading based on relative value—to remove “crowded” assets and add “cost-effective” ones, trying to serve the freshest, most appealing “dishes” to investors. Historically, my management results have performed well in terms of Sharpe ratio and drawdown control.

It’s worth noting that applying the relative value evaluation mindset to continuously optimize portfolios is effective not only for pure bond portfolios but also for fixed income + hybrid strategies. Especially for convertible bonds, which have mandatory redemption features, their return curves tend to converge, and their price range is more “controllable” compared to stocks. When managing a convertible bond portfolio within a primary bond fund, I select securities based on fundamentals, valuation, and premiums, aiming for those with manageable risk and potential for growth. Through active trading, I continuously eliminate crowded sectors and potential redemption risks, seeking sustainable development even in a market where convertible bonds are significantly overvalued.

Looking ahead to 2026—rewards and thorns are close, and maintaining a clear mind while moving lightly forward.

For 2026, I believe the main factors influencing the bond market are: first, the central bank’s continued room for easing, despite the Central Economic Work Conference’s mention of “flexible and efficient use of tools like rate cuts and reserve ratio reductions,” which many interpret as limited easing space, the overall direction remains accommodative—just a matter of timing. Second, changes in risk appetite. The stock market’s rally in 2025 was largely narrative-driven, based on expectations. As the rally deepens, the driving force may shift toward earnings recovery, requiring macroeconomic data support. Currently, the conditions for sustained growth in macro data are insufficient. Third, inflation and expectations. Recently, due to major geopolitical events, inflation expectations have risen with oil prices. Historically, in similar scenarios, if the economy remains weak while inflation rises, market dynamics become complex, with both upward and downward rate movements facing significant resistance. Managing trading rhythm amid the high uncertainty of geopolitical developments will be very challenging.

Summary: In a noisy and chaotic market, maintaining your core principles, sticking to your style, and playing to your strengths are crucial. Investment should be approached with the belief that “every day is a new day,” calming oneself and never abandoning reflection and learning from past market cases. With a mindful attitude, prepare to seize opportunities again. I believe in the principle that “everyone is equal before the market,” and as a fellow investor, I hope we can encourage each other.