Tactical Risk Rotation (TRRS)

Aug 2002 – Sep 2026	Strategy	SPY
Annual return (CAGR)	7.3%	11.2%
Worst drawdown	-38.5%	-55.2%
Sharpe ratio	0.61	0.66
Volatility	12.8%	18.7%
Annual return since publication (May 2014)	6.8%	13.9%

Jan 1962 – Sep 2026	Strategy	SPY
Annual return (CAGR)	8.4%	10.6%
Worst drawdown	-39.4%	-55.2%
Sharpe ratio	0.72	0.69
Volatility	12.3%	16.5%
Annual return since publication (May 2014)	6.8%	13.9%

The Tactical Risk Rotation Strategy (TRRS) comes from Michael Gayed and Charles Bilello's paper "An Intermarket Approach to Tactical Risk Rotation: Using the Signaling Power of Treasuries to Generate Alpha and Enhance Asset Allocation", which placed third for the 2014 NAAIM Wagner Award. Each month it compares the returns of 10-year and 30-year Treasuries. If the 10-year did better last month, it holds stocks for the next month; if the 30-year did better, it holds Treasuries. This page covers the 10-year version, TRRS 10.

The idea#

The bond market often senses trouble before the stock market does. When long-term Treasuries beat intermediate ones, long yields are falling faster, a sign that investors expect slower growth or are seeking safety. The authors found that stock market volatility tended to rise in the month after such a signal. When intermediate Treasuries do better, the environment has tended to be calmer for stocks.

The strategy uses that signal to switch the whole portfolio between stocks and bonds. Intermediate Treasuries are the defensive choice because they have tended to hold up when stocks fall.

How it works#

At the close of the last trading day of each month:

Compare the total return of intermediate Treasuries (IEF, standing in for the 10-year note) with that of long Treasuries (TLT, standing in for the 30-year bond) over the last 21 trading days.
If IEF returned more, hold the S&P 500 (SPY) for the next month.
Otherwise, hold IEF.

The paper's TRRS 30 version holds the 30-year bond instead of the 10-year note when the signal favors bonds.

What the backtest shows#

With real prices the test starts in August 2002, when these Treasury ETFs launched. Since then the strategy returned about 7% a year, against about 11% for the S&P 500 and 8% for a 60/40 portfolio. It trailed both on risk-adjusted return. Its worst drawdown, about 39% from November 2007 to March 2009, was smaller than the market's 55% but deeper than the 60/40 portfolio's 33%. It recovered in February 2011.

Its best years came when bonds did well and stocks struggled. It lost 22% in 2008 against 37% for the S&P 500, and gained 12% in 2011 while the market gained 2%. It fell far behind in strong stock markets, such as 2013, 2017, 2019, and 2023, when months in bonds left it with a fifth to less than half of the market's gain. In 2022 bonds offered no refuge, but it still lost less than the market, 11% against 18%.

Since the paper appeared in 2014 it has returned about 7% a year with a similar risk-adjusted return to its full history and a smaller worst drawdown, about 21%.

With simulated history the test starts in 1962. Over that span it returned about 8.4% a year, below the S&P 500's 10.5%, with a slightly better risk-adjusted return. It held up well in the bear market of 2000–02, gaining in 2000 and 2001 while the market fell. Its worst simulated drawdown, about 39%, came in the 1973–74 bear market, when the signal left it in stocks for much of the decline.

When it struggles#

Strong bull markets. A one-month bond signal often moves the portfolio out of stocks in rising markets, and it can spend many months in bonds during a long rally.
Stocks and bonds falling together. When inflation or rising rates hit both, the bond side does not protect, as in 2022.
Noise. A single month's return difference between two bond funds is a noisy signal, so many switches are false alarms.

Using it on Tactfolio#

The live strategy runs the rule each month on IEF, TLT, and SPY. Copy it to test the TRRS 30 version by holding TLT instead of IEF, or to use Treasury bills as the defensive asset.

Year by year

Year	Strategy	SPY
2026*	12.4%	14.0%
2025	19.8%	17.7%
2024	20.7%	24.9%
2023	7.4%	26.2%
2022	-10.6%	-18.2%
2021	19.1%	28.7%
2020	13.7%	18.3%
2019	6.8%	31.2%
2018	-8.9%	-4.6%
2017	5.1%	21.7%
2016	3.9%	12.0%
2015	-3.1%	1.2%
2014	8.3%	13.5%
2013	14.0%	32.3%
2012	11.3%	16.0%
2011	12.1%	1.9%
2010	17.1%	15.1%
2009	8.5%	26.4%
2008	-21.6%	-36.8%
2007	8.3%	5.1%
2006	1.6%	15.8%
2005	-2.7%	4.8%
2004	8.9%	10.7%
2003	24.3%	28.2%
2002*	12.5%	-3.3%

Year	Strategy	SPY
2026*	12.4%	14.0%
2025	19.8%	17.7%
2024	20.7%	24.9%
2023	7.4%	26.2%
2022	-10.6%	-18.2%
2021	19.1%	28.7%
2020	13.7%	18.3%
2019	6.8%	31.2%
2018	-8.9%	-4.6%
2017	5.1%	21.7%
2016	3.9%	12.0%
2015	-3.1%	1.2%
2014	8.3%	13.5%
2013	14.0%	32.3%
2012	11.3%	16.0%
2011	12.1%	1.9%
2010	17.1%	15.1%
2009	8.5%	26.4%
2008	-21.6%	-36.8%
2007	8.3%	5.1%
2006	1.6%	15.8%
2005	-2.7%	4.8%
2004	8.9%	10.7%
2003	24.3%	28.2%
2002	-5.1%	-21.6%
2001	4.4%	-11.8%
2000	6.1%	-9.7%
1999	22.9%	20.4%
1998	3.9%	28.7%
1997	26.6%	33.5%
1996	13.8%	22.5%
1995	19.7%	38.0%
1994	-3.5%	0.4%
1993	10.8%	9.7%
1992	11.0%	7.6%
1991	24.4%	30.3%
1990	-5.8%	-3.2%
1989	25.2%	31.5%
1988	9.9%	16.4%
1987	-2.2%	5.1%
1986	43.7%	18.6%
1985	20.9%	31.6%
1984	14.8%	6.2%
1983	10.1%	22.4%
1982	43.6%	21.6%
1981	-7.1%	-4.9%
1980	36.1%	32.4%
1979	10.8%	18.3%
1978	-1.7%	6.5%
1977	-3.1%	-7.2%
1976	17.5%	23.8%
1975	19.0%	37.1%
1974	-11.9%	-26.5%
1973	-13.4%	-14.7%
1972	6.1%	18.9%
1971	18.2%	14.1%
1970	-2.1%	3.9%
1969	-5.5%	-8.4%
1968	15.7%	10.9%
1967	7.2%	23.8%
1966	-9.3%	-10.1%
1965	10.5%	12.4%
1964	10.6%	16.4%
1963	16.1%	22.7%
1962*	4.5%	-5.5%

* Partial year.

The rules as implemented

This is the exact tree Tactfolio runs, rebalanced monthly with signals and trades at the close. Open it to inspect or copy it.

Sources and caveats

Michael A. Gayed and Charles V. Bilello, An Intermarket Approach to Tactical Risk Rotation: Using the Signaling Power of Treasuries to Generate Alpha and Enhance Asset Allocation (2014)

IEF (7–10 year Treasuries) stands in for the 10-year Treasury, TLT (20+ year Treasuries) for the 30-year Treasury, and SPY for the Fama/French US stock market.
The prior month's total return is measured over the last 21 sessions rather than the calendar month.
This is the TRRS 10 version, which holds the 10-year Treasury when bonds are signalled; the paper's TRRS 30 holds the 30-year Treasury instead.
Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is Tactical Risk Rotation?#

It is a monthly strategy by Michael Gayed and Charles Bilello that holds stocks when 10-year Treasuries outperformed 30-year Treasuries in the prior month, and Treasuries otherwise. The idea is that the bond market signals rising stock volatility in advance.

What is the difference between TRRS 10 and TRRS 30?#

Both use the same signal. TRRS 10 holds the 10-year Treasury when the signal favors bonds, and TRRS 30 holds the more volatile 30-year Treasury. This page tests TRRS 10 with IEF.

What ETFs does Tactical Risk Rotation use?#

IEF for intermediate Treasuries, TLT for long Treasuries, and SPY for US stocks. The paper used Treasury total return indexes and a total US stock market index.

Does Tactical Risk Rotation still work?#

Since the paper appeared in 2014 it has returned about 7% a year. Over its full real-price history it trailed a 60/40 portfolio on risk-adjusted return, and it lagged the S&P 500 in most strong years. The live record on Tactfolio shows how it is doing now.