Rules-Based Framework for Daily Rebalancing
Current Phase: Early Expansion (Offensive) EBP Proxy: -0.824 | VIX: 16.3
| Sector | Valuation Signal | Interpretation |
|---|
Date: 2026-08-30 | Turnover: 95.0% of NAV
This strategy pursues a 6% annualized yield target over a 5-year investment horizon through systematic exploitation of credit cycle dynamics across global fixed income markets.
Core Principles:
The strategy dynamically allocates to credit-sensitive sectors during favorable phases (early expansion, recovery) while preserving capital during contractions through maximum defensive positioning in government bonds and duration extension. FRED valuation signals adjust sector weights: overweight cheap sectors, underweight expensive ones.
Portfolio construction follows a 4-layer hierarchy. Each layer feeds into the next to determine final weights.
| Layer | Factor | Input / Threshold | Impact on Allocation |
|---|---|---|---|
| 1. Credit Cycle | EBP Proxy (FRED-enhanced) | -0.824 → Early Expansion (Offensive) | Sets sector min/max ranges (e.g., HY 0-30% in expansion, 0-5% in contraction) |
| 2. FRED Valuation | Spread Z-Scores | IG Z: -0.87 | HY Z: -1.28 | Adjusts sector midpoints ±5%: cheap sectors overweighted, expensive underweighted |
| 3. Momentum | 1M / 3M / 6M returns | 25% / 35% / 40% weighted composite | Ranks ETFs within each sector; 70% weight in expansion phases |
| 4. Quality | Credit rating (AAA→B) | Score: AAA=3, A=2, BBB=1, BB=0, B=-1 | Ranks ETFs within each sector; 60% weight in contraction phases |
Rebalancing Triggers:
Example: Today the EBP proxy is -0.824 (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.
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%.
| Layer | Factor | Input | Impact |
|---|---|---|---|
| 1. Credit Cycle | EBP Proxy | FRED-enhanced macro stress index | Sets sector min/max ranges (e.g., HY 0-30% in expansion, 0-5% in contraction) |
| 2. Valuation | Spread Z-Scores | IG/HY spreads vs 5-year history | Adjusts sector midpoints ±5%: cheap overweighted, expensive underweighted |
| 3. Momentum | Technical | 1M/3M/6M returns (25%/35%/40%) | Ranks ETFs within each sector; 70% weight in expansion phases |
| 4. Quality | Credit Rating | AAA=3, A=2, BBB=1, BB=0, B=-1 | Reranks within sector; 60% weight in contraction phases |
| EBP Level | Phase | Duration | Credit Beta | Quality Floor |
|---|---|---|---|---|
| < -0.5 | Early Expansion | 3-5y | 100% | BB- |
| -0.5 to 0.5 | Late Expansion | 5-7y | 60% | BBB- |
| 0.5 to 1.0 | Contraction | 7-12y | 25% | A- |
| > 1.0 | Recovery | 4-7y (barbell) | 50% | BBB- |
Duration is actively managed via three inputs:
Dynamic quality floor by phase with duration-quality interaction:
| Phase | Momentum | Quality | Duration Match |
|---|---|---|---|
| Early Expansion | 35% | 20% | 45% |
| Late Expansion | 25% | 35% | 40% |
| Contraction | 15% | 40% | 45% |
| Recovery | 30% | 25% | 45% |
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.
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.
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.
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).
| Ticker | Sector | Shares | Price | Value | Weight |
|---|---|---|---|---|---|
| VGIT | GOVT | 1859.96 | $57.87 | $107,635.75 | 10.9% |
| IEF | GOVT | 1165.62 | $92.10 | $107,354.01 | 10.8% |
| VMBS | MBS | 1888.86 | $45.82 | $86,547.52 | 8.7% |
| MBB | MBS | 936.32 | $92.41 | $86,525.30 | 8.7% |
| LQD | IG | 802.56 | $105.22 | $84,444.91 | 8.5% |
| USHY | HY | 2137.55 | $36.59 | $78,212.95 | 7.9% |
| HYG | HY | 988.27 | $79.10 | $78,171.82 | 7.9% |
| USIG | IG | 1531.11 | $49.89 | $76,386.88 | 7.7% |
| TIP | TIPS | 618.44 | $106.81 | $66,056.00 | 6.7% |
| SCHP | TIPS | 2551.92 | $25.82 | $65,890.67 | 6.7% |
| EMLC | EM | 1442.05 | $25.43 | $36,671.31 | 3.7% |
| EMB | EM | 380.80 | $94.09 | $35,829.65 | 3.6% |
| BKLN | LOAN | 1516.51 | $20.55 | $31,164.33 | 3.1% |
| Date | Action | Ticker | Shares | Price | Value | |
|---|---|---|---|---|---|---|
| 2026-09-02 | BUY | USIG | 1531.11 | $49.89 | $76,386.88 | Rebalance: increase USIG to 7.7% |
| 2026-09-02 | SELL | IGIB | 1459.17 | $51.73 | $75,482.81 | Rebalance: reduce IGIB from 7.6% to 0.0% |
| 2026-08-30 | BUY | TIP | 618.44 | $107.44 | $66,445.62 | Rebalance: increase TIP to 6.6% |
| 2026-08-30 | BUY | SCHP | 2551.92 | $26.04 | $66,452.09 | Rebalance: increase SCHP to 6.6% |
| 2026-08-30 | BUY | MBB | 936.32 | $93.52 | $87,564.61 | Rebalance: increase MBB to 8.8% |
| 2026-08-30 | BUY | VMBS | 1888.86 | $46.37 | $87,586.39 | Rebalance: increase VMBS to 8.8% |
| 2026-08-30 | BUY | BKLN | 1516.51 | $20.53 | $31,134.00 | Rebalance: increase BKLN to 3.1% |
| 2026-08-30 | BUY | EMB | 380.80 | $95.13 | $36,225.68 | Rebalance: increase EMB to 3.6% |
| 2026-08-30 | BUY | EMLC | 1442.05 | $25.77 | $37,161.61 | Rebalance: increase EMLC to 3.7% |
| 2026-08-30 | BUY | HYG | 988.27 | $79.87 | $78,932.79 | Rebalance: increase HYG to 7.9% |
| 2026-08-30 | BUY | USHY | 2137.55 | $36.94 | $78,961.08 | Rebalance: increase USHY to 7.9% |
| 2026-08-30 | BUY | IGIB | 1459.17 | $52.41 | $76,475.04 | Rebalance: increase IGIB to 7.6% |
| 2026-08-30 | BUY | LQD | 802.56 | $106.73 | $85,656.77 | Rebalance: increase LQD to 8.6% |
| 2026-08-30 | BUY | IEF | 1165.62 | $93.23 | $108,671.17 | Rebalance: increase IEF to 10.9% |
| 2026-08-30 | BUY | VGIT | 1859.96 | $58.46 | $108,733.13 | Rebalance: increase VGIT to 10.9% |
| Date | From Phase | To Phase | Trigger | Turnover | Duration | Key Signals | Top Moves | Reason | |
|---|---|---|---|---|---|---|---|---|---|
| 2026-09-02 | Early Expansion (Offensive) | — | Early Expansion (Offensive) | 2% Threshold | 15.3% | Neutral (41bp) | IG Z:-0.87 | HY Z:-1.28 | Real Yld:2.40% | ▲ USIG 76,387 | ▼ IGIB 75,483 | Phase: Early Expansion (Offensive) (EBP: -0.824) | Trigger: Turnover 15.3% > threshold 5.0% after 3d interval | TX cost: 0.3% round-trip | IG=80bp HY=263bp | Curve=41bp | RealYield=2.40% | Cheap: GOVT, MBS, TIPS | Expensive: IG, HY, EM, LOAN | Duration: neutral (41bp) | Vol scale: 1.00x | Moves: +USIG, -IGIB |
| 2026-08-30 | Early Expansion (Offensive) | — | Early Expansion (Offensive) | 5% Threshold | 95.0% | Neutral (47bp) | IG Z:-0.92 | HY Z:-1.28 | Real Yld:2.36% | ▲ VGIT 108,733 | ▲ IEF 108,671 | ▲ VMBS 87,586 | PHASE CHANGE: None → Early Expansion (Offensive). EBP proxy crossed threshold at -0.847. | Trigger: Phase change confirmed (20+ day hysteresis) | TX cost: 0.3% round-trip | IG=79bp HY=263bp | Curve=47bp | RealYield=2.36% | Cheap: GOVT, MBS, TIPS | Expensive: IG, HY, EM, LOAN | Duration: extend (47bp) | Vol scale: 1.00x | Moves: +VGIT, +IEF, +VMBS |
| Sector | Tickers | Duration | Quality |
|---|---|---|---|
| Government Bonds | TLT, IEF, SHY, VGIT, SCHO | Short / Intermediate / Long | AAA |
| IG Corporate | LQD, IGIB, VCIT, USIG | Intermediate | A / BBB |
| HY Corporate | HYG, JNK, USHY | Intermediate | BB / B |
| EM Debt | EMB, EMLC, PCY | Intermediate / Long | BB / B |
| Leveraged Loans | BKLN, SRLN | Short | BB / B |
| MBS | MBB, VMBS | Intermediate | AAA |
| TIPS | TIP, SCHP, WIP | Intermediate / Long | AAA |