Day Hagan Smart Sector® Fixed Income Strategy Update July 2025
A downloadable PDF copy of the Article:
Day Hagan Smart Sector® Fixed Income Strategy Update July 2025 (pdf)
Executive Summary
In June, the U.S. fixed income market navigated a complex landscape shaped by Treasury auctions, Federal Reserve commentary, and mixed inflation signals. Treasury yields experienced volatility but trended downward, with the 10-year Treasury yield closing at 4.235% on June 30, after peaking at 4.51% earlier in the month. The 2-year yield fell to 3.75%, its lowest since early April, reflecting softer economic data and dovish Fed rhetoric.
Key Treasury auctions provided insights into investor sentiment. A $39 billion 10-year note auction on June 11 saw robust demand, with a bid-to-cover ratio of 2.67, signaling confidence despite concerns about tariff-related inflation. Conversely, a $22 billion 30-year bond auction, yielding 4.84%, highlighted strong buying interest as investors locked in rates amid expectations of Federal Reserve rate cuts.
Fed Chair Jerome Powell maintained a cautious stance at the June FOMC meeting, holding rates at 4.25-4.50% and projecting 1.4% GDP growth and 3.1% core PCE inflation for 2025. Governors Waller and Bowman suggested a potential July rate cut, boosting market expectations for a September cut.
Inflation reports added complexity: May’s CPI dropped to 2.4% year-over-year, but core PCE at 2.7% raised concerns about persistent price pressures, particularly from tariffs. High-yield corporates outperformed, returning 0.81%, with CCC-rated bonds gaining 1.02%. Municipal bonds and securitized assets offered value amid a steepening yield curve, driven by investor demand for higher term premiums. Despite volatility, fixed income remained attractive for income-focused investors, supported by strong fundamentals and anticipated Fed easing.
Holdings
Fixed Income Sector
US 1-3 Month T-bill
US 3-7 Year Treasury
US 10-20 Year Treasury
TIPS (short-term)
US Mortgage-Backed
US Floating Rate
US Corporate
US High Yield
International Corporate Bond
Emerging Market Bond
Outlook (relative to benchmark)
Overweight
Neutral
Neutral
Underweight
Neutral
Neutral
Underweight
Overweight
Neutral
Overweight
Position Details
U.S. Treasuries: The 10-year Treasury yield peaked at 4.5% and declined by the end of June. Several measures indicate that the move is extended and that there is a likelihood of mean reversion. Measures of bond volatility, option-adjusted spreads, the U.S. dollar, and mean reversion are negative. Given that the Fed is likely to lower rates by September, we have lowered duration by adding to our shorter-term maturities.
Commentary: U.S. Treasuries saw significant movement as investors responded to shifting Federal Reserve signals, major Treasury auctions, and new inflation data. Short-term yields dropped notably, with the 8-week Treasury bill auction on June 19 closing at 4.30%, marking the lowest level since early 2023. This decline reflected growing market forecasts of Fed rate cuts later in the year, especially after the central bank maintained its policy rate and adopted a more dovish tone in its June meeting. Heightened geopolitical tensions in the Middle East further increased demand for safe-haven assets, contributing to the downward pressure on short-term yields. Meanwhile, longer-term yields remained relatively stable but elevated, with the 10-year Treasury yield ending the month at 4.39% and the 30-year just below 5%. Key auctions, including $39 billion in 10-year notes and $22 billion in 30-year bonds, were closely watched as investors weighed the government’s fiscal outlook and persistent deficit concerns. Inflation remained a central focus, as the Fed’s preferred gauge—the PCE index—showed an unexpected uptick, prompting the central bank to remain cautious about immediate rate cuts. While bond markets rallied in June, analysts warned of continued volatility as investors adjust to evolving monetary policy and fiscal dynamics.
Figure 1: Credit Default Swap rates continue to move lower for U.S. Treasuries.
U.S. TIPS: The TIPS composite model improved due to U.S. inflation measures surprising to the upside and an increasing number of forecasts calling for increased inflation pressures into the end of 2025. Technical indicators improved, confirming the trend. We note that a slight rise in commodity price trends is supportive in the near term. Momentum indicators, along with widening credit spreads, are negative.
Commentary: Real yields on TIPS, which reflect inflation-adjusted returns, edged lower over the month. The 10-year TIPS real yield, for example, moved from around 2.00% at the start of June to 1.94% by mid-month, mirroring a broader decline in real yields across the Treasury curve. This drop was driven by growing market confidence that inflation would continue to moderate, with the TIPS market pricing in long-term inflation expectations just above the Fed’s 2% target. The Treasury’s June auctions, including a $20 billion 10-year TIPS offering, saw solid demand as investors sought protection against lingering inflation risks while also responding to the Fed’s cautious stance on rate cuts. Meanwhile, the Fed’s preferred inflation gauge, the PCE index, showed a slight uptick, keeping inflation concerns alive but not enough to derail the downward trend in real yields.
Figure 2: Inflation expectations are perking up but expected to be transitory.
U.S. Mortgage-Backed Securities: The composite model remained neutral, with measures of RSI and 10-year yield trends indicating bullish trends. Indicators, including inflation expectations and high-yield option-adjusted spreads, are negative. We are neutral.
Commentary: MBS prices saw modest gains as Treasury yields declined from their spring highs, but spreads remained elevated compared to historical norms, reflecting persistent concerns about housing market fundamentals and the broader economic outlook. The Federal Reserve continued its balance sheet reduction, aiming to trim $35 billion in MBS holdings monthly, but the actual runoff lagged behind targets due to subdued refinancing and home sales activity. As of mid-June, the Fed’s MBS portfolio stood at $2.156 trillion, significantly above its intended pace of reduction, indicating slow progress in shrinking its footprint in the mortgage market. Fed commentary in June emphasized caution, with Chair Powell noting that tariff-driven inflation could keep core inflation above the 2% target, complicating the outlook for rate cuts and keeping mortgage rates elevated. The market’s expectation of eventual Fed easing provided some support for MBS demand, but the absence of direct Fed purchases left private investors as the primary buyers, leading to higher risk premiums.
Figure 3: Lower rates benefit consumers and mortgages.
U.S. Floating Rate Notes: The model’s technical indicators are displaying oversold conditions and volatility extremes. We added a modest amount and are neutral. We will look to add if the technical backdrop reverses to bullish conditions.
Commentary: FRNs, which reset their interest rates weekly based on the most recent 13-week Treasury bill auction plus a fixed spread, offered investors a way to manage interest rate risk amid ongoing uncertainty. The month’s key 2-year FRN auction, held on June 24, saw a bid-to-cover ratio of 2.58, indicating solid investor appetite. The high yield for the auction was 3.786%, with a median yield of 3.73%, reflecting competitive bidding and continued interest in short-duration, floating-rate government debt. The Federal Reserve’s June meeting left the federal funds rate unchanged at 4.25%-4.50%, with policymakers signaling patience in the face of persistent inflation and tariff-related uncertainties. This policy stance, combined with the floating nature of FRN coupons, helped keep FRN prices stable even as fixed-rate Treasuries saw more pronounced price movements. Inflation data remained a focal point, with the Fed’s preferred measures showing only modest increases, supporting the case for holding FRNs as a hedge against further rate volatility.
Figure 4: Short-term momentum is oversold. A reversal higher would indicate that FRNs are poised for additional upside.
U.S. IG Corporates: The composite model is underweight, with indicators calling the U.S. dollar (weakness), short-term trend (negative), implied bond volatility (high), and price mean reversion trying to stabilize. However, those indicators remain on sell signals. We do note that option-adjusted spreads and CDS have reversed from higher levels as equity markets gained their footing.
Commentary: U.S. investment-grade corporate bonds delivered steady, if unspectacular, performance amid a backdrop of shifting Federal Reserve policy, volatile Treasury yields, and persistent inflation concerns. The Federal Reserve’s decision to hold the federal funds rate steady at 4.25%-4.50% and its cautious tone on future rate cuts set the stage for the month, as policymakers cited ongoing tariff-related uncertainties and a stubbornly high core inflation rate, with the PCE index expected to average 3.1% for the year. Investment-grade corporate bond yields remained attractive, with the average yield-to-worst on the Bloomberg US Corporate Bond Index hovering near 5.2%, close to the upper end of its 15-year range. However, spreads—the extra yield over comparable Treasuries—remained tight, averaging just 0.85% as of June 20, reflecting strong demand but limited compensation for credit risk. Despite these tight spreads, inflows into investment-grade corporates surged, with more than $5 billion entering the sector in late June, the largest weekly inflow in over a month. Robust supply continued, with over $36 billion in new issuance, all of which was well absorbed by the market. While inflation and Fed policy kept investors cautious, the sector’s high absolute yields and defensive characteristics made it a favored choice for those seeking stability and income in a volatile environment.
Figure 5: Implied bond volatility rated neutral.
U.S. High Yield: The composite model remains in an overweight position; as equities go, so goes high yield. Measures of trend, relative volatility, small-cap equity trends, and high-yield bond breadth are bullish.
Commentary: U.S. high yield bonds posted positive performance in June, with the ICE BofA U.S. High Yield Index rising 1.86% for the month and bringing year-to-date gains to 4.55%. This rally occurred despite continued signs of sluggish economic growth, such as soft unemployment claims, weak housing starts, and lackluster ISM manufacturing data, all of which were likely dampened by earlier tariff uncertainty. However, several factors fueled investor confidence: inflation remained muted over the past three months, raising expectations for Federal Reserve rate cuts potentially starting in September, and the market now anticipates as many as five cuts by the end of 2026. Geopolitical risk premiums eased after the U.S. bombing pause in the Middle East and NATO’s increased defense spending commitments, while oil prices stayed moderate at $65 per barrel, supportive of growth without stoking inflation. Treasury yields fell, helping high yield returns as both rates and credit spreads tightened. B-rated bonds led the rally, with Consumer Products, Energy, and Retail sectors outperforming, while Gaming, Leisure, and Insurance lagged. The high yield market ended June with a yield of 7.05% and a spread of 296 basis points, positioning the sector for continued attractive returns as growth expectations improve and Fed policy shifts toward easing.
Figure 6: Tighter overall corporate credit spreads are positive for High-Yield bonds.
International IG Bonds: The composite model remains neutral, with measures of equity risk, credit default swaps, and option-adjusted spreads negative. Short-term technical measures are improving. We remain neutral.
Commentary: International investment-grade corporate bonds delivered modest but positive returns in June, navigating a landscape marked by volatile global interest rates, persistent inflation concerns, and mixed economic signals. The global investment-grade bond index yielded approximately 4.8%, significantly above its 10-year average, making these bonds relatively attractive for income-seeking investors, despite tighter spreads and limited excess return potential. In Europe, yields on 10-year government bonds remained stable or edged lower, as the European Central Bank’s recent rate cuts were offset by fiscal policy shifts, including Germany’s move toward higher deficit spending. Meanwhile, U.S. Treasury yields declined during the month, providing some support to global corporate bond prices, but also reflecting ongoing concerns about inflation and fiscal deficits. Fund flows into international investment-grade corporates increased, with investors favoring higher-quality issues amid lingering concerns about slower global growth and heightened geopolitical risks. Looking ahead, analysts remain cautious, noting that while yields are compelling, tight credit spreads and economic uncertainty may limit further upside for international investment-grade corporate bonds in the second half of 2025.
Figure 7: International IG Corporate trends are positive from a longer-term perspective.
Emerging Market Bonds: The EM bond model remains bullish. Trend, currency, relative strength, and EM equity momentum are bullish supports. We remain overweight.
Commentary: Emerging market bonds delivered robust returns in June, fueled primarily by a weaker U.S. dollar and renewed investor appetite for local currency debt. After years of underperformance, emerging market local-currency bonds attracted a record $3.8 billion in inflows during the month, marking eight consecutive weeks of positive flows. This surge was driven by several factors: the dollar fell to its lowest level in over three years, global investors sought diversification away from U.S. assets, and yields in developed markets declined, prompting a search for higher returns. Major emerging economies such as Brazil, Mexico, Indonesia, and India saw increased foreign investment, and the JPMorgan Emerging Market Currency Index reached its lowest yield since 2022, reflecting the influx of capital. Returns on local-currency emerging market government bonds have exceeded 10% year-to-date, far outpacing the roughly 4% return from hard-currency counterparts. This outperformance was supported by easing global trade tensions, as the U.S. and China agreed to a temporary tariff reduction, which boosted risk sentiment and supported emerging market assets. Most emerging market central banks continued cautious monetary policies, balancing inflation pressures with currency stability. While inflows remain modest compared to the long period of outflows, the trend signals a potential turning point for the asset class, with analysts expecting continued strong performance if the dollar remains weak and global growth stabilizes.
Figure 8: Emerging Market equity momentum has supported EM bond prices. A decline below the 0 line would lead us to reduce exposure.
Catastrophic Stop Model
The Catastrophic Stop model combines time-tested, objective indicators designed to identify high-risk periods for the equity market. The model entered June recommending a fully invested allocation relative to the benchmark.
The Catastrophic Stop model combines time-tested, objective indicators designed to identify high-risk periods for equities and assets with high correlations to the equity market. The model entered July recommending a fully invested allocation relative to the benchmark for credit sectors with high correlations.
The Day Hagan Catastrophic Stop model level is 77.27%. Measures evaluating recent breadth thrusts, oversold mean reversion probabilities, investor sentiment, longer-term trends, volume-adjusted supply versus demand, relative stock versus bond trends, credit spreads, and economic activity are supportive. We note that several indicators are positioned to shift to sell signals should upside momentum start to fade.
The weight of the evidence suggests that the recent decline is not expected to extend into a significant downtrend. Of course, if our model flips negative (below 40% for two consecutive days), signaling more substantial problems, we will raise cash immediately by reducing exposure to Emerging Market bonds, High-Yield, U.S. Corporates, and Floating Rate Notes.
Figure 9: The Catastrophic Stop model recommends a fully invested position (relative to the benchmark). Note: Due to the use of indices to extend model history, the model is considered hypothetical.
Figure 10: S&P 500 Index vs. Day Hagan Daily Market Sentiment Composite
The Day Hagan Daily Market Sentiment Composite has moved further into the excessive optimism zone. This is not unusual after significant declines; historically, the model has often shown extreme pessimism that quickly transitions into excessive optimism. We interpret this rapid movement similarly to a “breadth thrust.” With sentiment indicators, we go with the flow until it reaches an extreme and reverses. In other words, we will rate this indicator as neutral until it reverses back below 70.
Figure 10: S&P 500 Index vs. Day Hagan Daily Market Sentiment Composite
Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. Currently, the uptrend remains intact. The broader-based composite models calling U.S. economic growth, international economic growth, inflation trends, liquidity, and equity demand remain constructive. The Catastrophic Stop model is positive, and we are aligned with the message. If our models shift to bearish levels, we will raise cash.
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, rational, and unemotional decisions about how much capital to place at risk and where to allocate that capital.
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trl
Sarasota, FL 34236
Toll Free: (800) 594-7930
Office Phone: (941) 330-1702
Website: https://dayhagan.com or https://dhfunds.com
© 2025 Day Hagan Asset Management
This material is for educational purposes only. Further distribution is prohibited without prior permission. Please see the information on Disclosures and Fact Sheets here: https://dhfunds.com/literature. Charts with models and return information use indices for performance testing to extend the model histories, and they should be considered hypothetical. All Rights Reserved. (© Copyright 2025 Day Hagan Asset Management.)
Day Hagan Smart Sector® Fixed Income ETF
Symbol: SSFI
Disclosures
The data and analysis contained within are provided "as is" and without warranty of any kind, either express or implied. The information is based on data believed to be reliable, but it is not guaranteed. Day Hagan DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OR USE. All performance measures do not reflect tax consequences, execution, commissions, and other trading costs, and as such, investors should consult their tax advisors before making investment decisions, as well as realize that the past performance and results of the model are not a guarantee of future results. The Smart Sector® Strategy is not intended to be the primary basis for investment decisions and the usage of the model does not address the suitability of any particular in Fixed Income vestment for any particular investor.
Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such devices. Day Hagan believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider differing viewpoints and use a weight-of-the-evidence approach that fits their investment needs.
Past performance does not guarantee future results. No current or prospective client should assume future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a portfolio will match or outperform any particular benchmark.
Day Hagan Asset Management is registered as an investment adviser with the United States Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.
There may be a potential tax implication with a rebalancing strategy. Re-balancing involves selling some positions and buying others, and this activity results in realized gains and losses for the positions that are sold. The performance calculations do not reflect the impact that paying taxes would have, and for taxable accounts, any taxable gains would reduce the performance on an after-tax basis. This reduction could be material to the overall performance of an actual trading account. Day Hagan does not provide legal, tax or accounting advice. Please consult your tax advisor in connection with this material, before implementing such a strategy, and prior to any withdrawals that you make from your portfolio.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.
© 2024 Day Hagan Asset Management
