Commentary
We continue to believe the labor market will remain “strong enough” because the breakeven rate has fallen as population growth slows. This means the economy is stronger than many think, with nominal GDP above 5% and inflation remaining “sticky” near 3%. Equities and corporate spreads are back at record levels, indicating stretched valuations and record-tight spreads. Lastly, despite a weak December and 2025, the dollar appears poised for a comeback in 2026.
The characteristics, rationale, and deviations below reflect the index positioning relative to the baseline benchmark effective January 2, 2025.
Relative Positioning
Duration
Underweight
Yield Curve
Bulleted
Corporate Credit
Underweight
Securitized
Neutral
Conviction
Short-Term TIPS & US Dollar Bullish
Rationale
| 90% Duration | The committee expects the economy and inflation to remain stronger than expected. Despite Fed cuts, the 10-year yield remains above its September 2024 low of 3.60%. The duration of our index is 90% the duration of a benchmark index. |
| Bulleted Curve | We expect long-term yields to rise faster than short-term yields, thereby steepening the yield curve. The Index holds a bulleted curve position relative to the benchmark. This position would benefit from a steepening yield curve. |
| 70% Underweight Credit | Relative corporate bond positions are correlated to stock market movements. Equities have been weakening while credit spreads have widened. An underweight position benefits from a weakening equity market. |
| Neutral Securitized | The index holds a neutral position relative to the benchmark within the securitized sector. Increasing volatility makes owning MBS less attractive. |
| 10% Short-Term TIPS | A short-term TIPS position offers inflation protection at an attractive yield. Breakeven inflation rates have narrowed, making this an attractive position. |
| 10% US Dollar Bullish | After a year of trending lower, the dollar is making a comeback, making a bullish dollar play attractive. The Index holds a 10% bullish position on the US dollar. |
Deviations
Allocation
| Name | Market Value (%) |
|---|---|
| iShares MBS ETF | 26.35 |
| iShares 3-7 Year Treasury Bond ETF | 16.65 |
| iShares 7-10 Year Treasury Bond ETF | 11.20 |
| iShares 0-5 Year TIPS Bond ETF | 10.00 |
| WisdomTree BBG USD Bullish Fund | 10.00 |
| Vanguard Intermediate-Term Corporate Bond ETF | 9.85 |
| Schwab Long-Term U.S. Treasury ETF | 5.10 |
| iShares BBB Rated Corporate Bond ETF | 4.00 |
| Vanguard Long-Term Corporate Bond ETF | 3.70 |
| Vanguard Short-Term Corporate Bond ETF | 2.00 |
| Schwab Short-Term U.S. Treasury ETF | 1.15 |