Adaptive Credit-Cycle Fixed Income Strategy

📊 FRED Valuation Signals

Date: 2026-06-05 | Turnover: 21.8% of NAV

Transactions Executed

• BUY TIP: $27,612 (2.8% of NAV) — Rebalance: increase TIP to 7.3%
• BUY SCHP: $27,593 (2.8% of NAV) — Rebalance: increase SCHP to 7.3%
• BUY MBB: $29,993 (3.1% of NAV) — Rebalance: increase MBB to 9.8%
• BUY VMBS: $30,091 (3.1% of NAV) — Rebalance: increase VMBS to 9.8%
• SELL EMLC: $24,472 (2.5% of NAV) — Rebalance: reduce EMLC from 6.9% to 4.4%

🔧 Allocation & Rebalancing Engine

Portfolio construction follows a 4-layer hierarchy. Each layer feeds into the next to determine final weights.

Rebalancing Triggers:

• Phase Change: Credit cycle shifts (e.g., Early Expansion → Late Expansion) → full reallocation
• 5% Turnover Threshold: Cumulative drift across all positions exceeds 5% of NAV
• 2% Instrument Threshold: Any single ETF drifts >2% from target weight
• Force Rebalance: Manual override for exceptional events

Example: Today the EBP proxy is -0.626 (Early Expansion). Sector ranges are: Govt 10-30%, IG 20-30%, HY 20-30%, EM 10-20%, Loan 5-15%, MBS 10-20%, TIPS 5-15%. FRED Z-scores show IG and HY as expensive, so their weights are pulled down by ~5% from midpoint. Within each sector, the top 50% of ETFs by momentum+quality composite are selected.

📘 Strategy Documentation

A rules-based, daily-rebalancing fixed income strategy that dynamically shifts between credit-sensitive and defensive positioning. Targets 6% annualized yield with maximum drawdown capped at 10%.

The Four-Factor Engine

Credit Cycle Phases

Duration Determination

Duration is actively managed via three inputs:

• Phase: Sets base target (4.0y early expansion, 9.5y contraction)
• Yield Curve: Steep (>100bp 2s10s) → extend 25%; Flat → neutral; Inverted → shorten 25%
• Tail Risk: EBP > 75th percentile → automatic +35% extension in high-quality sovereigns

Quality/Rating Determination

Dynamic quality floor by phase with duration-quality interaction:

• Contraction: Extend duration ONLY in AAA/AA government bonds. Long-duration HY avoided.
• Early Expansion: Lower quality acceptable (BB/B) if momentum supports.
• Quality Score: Combined with momentum and duration match for final ETF ranking.

Factor Weights by Phase

Note: The strategy is not a simple sum of factors. It is a hierarchical filter: phase sets boundaries, valuation shifts midpoints, momentum and quality select instruments, and duration match ensures the portfolio hits its macro-duration target. Hysteresis requires 20+ consecutive days to confirm phase changes, preventing whipsaw rebalancing.

⏱️ Duration Management

Portfolio duration is actively managed based on credit cycle phase + yield curve signals.

Duration-Quality Interaction: In contraction phases, the strategy extends duration in high-quality bonds (AAA/AA) while avoiding long-duration low-quality credit. This maximizes flight-to-quality benefit while minimizing spread-widening risk.

📉 Volatility Targeting

Realized portfolio volatility is monitored and exposure scaled to maintain 5-8% annualized target.

Mechanism: When realized vol exceeds 8%, gross exposure is reduced proportionally (scale = 6.5% / realized_vol). When vol falls below 5%, exposure can increase up to 1.15x. This prevents volatility from compounding during stress periods.

🛡️ Tail Risk Overlay

Automatic defensive protocols activate when macro indicators exceed critical thresholds.

Activation Rules: When EBP exceeds 75th percentile historical level, the system automatically extends duration in high-quality sovereign bonds by 35% and reduces credit beta. Maximum defensive protocols engage at 90th percentile with synthetic hedging via CDS indices (when available).

Rebalancing History

Investment Universe