Paired bond and currency proxies with weekly crossover confirmation

A squeezed cash sleeve

A standard allocation sleeve shifts capital among equities, bonds, and cash. Lifting the cash weight in a downturn can compress that sleeve’s return when short-term rates are also falling.

The archive did not replace cash with a single market. When the same intermediate regime favored both sides, it used a paired-sleeve, splitting the cash-replacement allocation between a long-duration bond proxy and a foreign-currency proxy.

Classify the yield-and-currency regime first

In the described linkage, falling bond prices raise yields, and higher yields can increase demand for that country’s currency. That pairing is the rate-currency-regime: the observed tendency for higher long-bond yields to accompany a firmer domestic currency index, and the reverse when yields fall. The cross-market reading is the intermarket context that sits in front of any single-fund timing.

The sleeve held listed funds as an index-proxy, a listed fund used as a stand-in for a related futures or cash market so the sleeve can be held without managing contract expiration. A long-duration zero-coupon series stood in for the Treasury futures complex, foreign-currency funds stood in for individual exchange rates, and a money-market seven-day yield stood in for short-term rates.

A domestic dollar index was treated as rising when foreign currencies fell. Over the illustrated window, long-bond yields and that dollar index moved in the same direction. The illustrated proxies were described as tracking related markets: the long-duration zero-coupon fund moved opposite the 30-year Treasury yield, and the Deutschemark fund moved opposite the dollar index.

Weekly crossover needs a slower confirmation

Weekly timing used two layers. The first is a moving-average-crossover: a weekly close crossing and remaining on one side of a 10-week average, used to mark candidate entries and exits in the fund proxies.

The second is ten-minus-four, the arithmetic gap between a 10-week and a 4-week average of the same fund. A reading that stays on the same side of zero is used to confirm the weekly average crossover. Without that slower confirmation, the weekly close versus the 10-week average was not treated as enough.

Bond-proxy trades wait for two overlays

Bond-proxy trades were generally withheld unless a trader-sentiment series and a bond-option activity ratio agreed. That filter is sentiment-confirmation: it withholds a bond-proxy trade unless a trader-sentiment series and the option-activity-ratio point in the same direction. A sentiment reading below 43 percent was treated as a buy cue and readings of 60 percent or higher as a sell cue.

The option-activity-ratio is a bond-futures comparison of put volume to put open interest, divided by the same ratio for calls, used to flag intermediate extremes. Extreme readings on that ratio, often above 1.8 for buys and often, though not always, below 0.65 for sells, were used to mark intermediate turning points.

When the two proxies stop moving together

After a mid-September 1992 European currency shock, a firmer dollar coincided with a sharp drop in Treasuries and foreign-currency funds. Later that autumn both overlays flashed bond buy cues, but the currency proxy lagged the long-duration bond proxy.

The later split, bond proxy firm and currency proxy weak, was tied to a flattening-to-rising short-rate slope at home plus weaker European growth and expected lower European rates, with the dollar index described as meeting resistance near 91.