The natural rate of interest, defined as the equilibrium real interest rate in an ideal, frictionless economy, serves as a critical real interest rate anchor for price-based monetary policy. The difference between the real interest rate and the natural rate of interest, referred to as the “natural rate gap”, contains valuable information about economic fundamentals and the central bank’s monetary policy, which plays an important role in the pricing of treasury bonds. The paper estimates China’s natural rate of interest through a semi-structural macroeconomic model and finds that the natural rate gap is informative for forecasting treasury bond excess returns. Specifically, the higher the natural rate gap, the higher the excess returns on China treasury bonds. In contrast to findings in developed financial markets, variations in the natural rate gap explained by macroeconomic variables do not exhibit significant predictive power for bond excess returns in China. This suggests that macroeconomic fundamentals are not fully priced into China’s treasury bonds market. To further investigate the mechanism behind the return predictability of the natural rate gap, this paper analyzes it from the perspective of yield-oriented investors. Due to tax considerations on capital gains and other factors, commercial banks, which are the primary holders of China treasury bonds, tend to hold bonds till maturity and may place more emphasis on yield to maturity rather than expected return. Both theoretical and empirical results suggest that commercial banks’demand for treasury bonds is a key mechanism through which the natural rate gap influences bond pricing. Overall, this paper not only presents new insights into the cyclical characteristics of the natural rate of interest but also offers perspectives on the pricing mechanisms of treasury bonds.