Rate-Sensitive Sector Pairs

## Rate-Sensitive Sector Pairs — Full Methodology

### Rate Regime Classification

1. **Rising rates, accelerating:** 10Y yield rising AND rate of change increasing → favor XLF (banks profit from rising rates)

2. **Rising rates, decelerating:** 10Y yield rising BUT rate of change slowing → favor XLU (defensive, high-yield sector)

3. **Falling rates, accelerating:** 10Y yield falling AND rate of change increasing → favor TLT (bonds rally as rates drop)

4. **Falling rates, decelerating:** 10Y yield falling BUT rate of change slowing → equal-weight all three

### Allocation Rules

- Allocate 100% to the favored sector/asset class based on rate regime

- If regime is ambiguous (regime 4), equal-weight XLU/XLF/TLT at 33.3% each

- Rebalance on the first trading day of each month

- Cash override: If all three are below their 200-day SMA, go 100% cash

### Entry/Exit

- No individual entry/exit rules — rotation handles positioning

- The strategy is always invested unless the cash override triggers

### Position Sizing

- Allocate 20–40% of total portfolio to this strategy

- The remainder can be in core equity/bond holdings

### Best Market Conditions

Works best during clear rate trends (2022 rising rates → XLF; 2024 rate pause → TLT). The strategy adapts to the rate cycle automatically. Underperforms during rate volatility with frequent regime changes (whipsaw in rate expectations).

### Backtest Notes

Tested on XLU/XLF/TLT + 10Y Treasury yield monthly data from Jan 2012 to Dec 2024. Rate regime classification uses 3-month and 6-month rate of change. The cash override triggered twice (2020 COVID crash, 2022 everything-selloff).