What is the Treasury Duration Limiter (TDL)?

Q: What is the Treasury Duration Limiter (TDL)?

Treasury Duration Limiter, TDL . This is a protective overlay built into several DMS strategies which restricts the Risk Off holding to short-duration treasuries when long-duration treasuries would have otherwise been allocation. Why it exists Many DMS strategies will hold long duration treasuries as their Risk Off asset (some go into CAOS.) Historically, when equities fall, investors flee to long-duration treasuries, which drives their prices up and helps cushion market drawdowns. This relationship held reliably for decades. But it is not guaranteed. In early 2022, rising interest rates caused long-duration treasuries to fall at the same time as equities — one of the worst-ever years for long-duration treasury returns on record. Strategies that rotated defensively into long-term treasuries in that environment found that the expected safe harbor was also under water. TDL was developed in response to that new reality. The goal: if long-duration treasuries look likely to be hazardous, steer into short-duration treasuries instead and avoid the compounding of a bad equity period with bad treasury performance. How the signal works TDL uses a momentum-based signal on long-duration treasuries themselves . It applies a weighted lookback to the returns of long-duration treasuries, using a front-weighted formula that prioritizes more recent price behavior and will keep the Risk Off allocation in shorter duration treasuries if it looks to be the better option. What TDL does not do TDL is only active when a strategy is already in its risk-off, defensive position. It has no effect on equity allocations and does not determine when to enter or exit equities — that remains the exclusive domain of the strategy's momentum rules. TDL is purely a safety layer within the treasury sleeve.

Question

Accepted Answer

Treasury Duration Limiter, TDL. This is a protective overlay built into several DMS strategies which restricts the Risk Off holding to short-duration treasuries when long-duration treasuries would have otherwise been allocation.

Why it exists

Many DMS strategies will hold long duration treasuries as their Risk Off asset (some go into CAOS.) Historically, when equities fall, investors flee to long-duration treasuries, which drives their prices up and helps cushion market drawdowns. This relationship held reliably for decades. But it is not guaranteed. In early 2022, rising interest rates caused long-duration treasuries to fall at the same time as equities — one of the worst-ever years for long-duration treasury returns on record. Strategies that rotated defensively into long-term treasuries in that environment found that the expected safe harbor was also under water.

TDL was developed in response to that new reality. The goal: if long-duration treasuries look likely to be hazardous, steer into short-duration treasuries instead and avoid the compounding of a bad equity period with bad treasury performance.

How the signal works

TDL uses a momentum-based signal on long-duration treasuries themselves. It applies a weighted lookback to the returns of long-duration treasuries, using a front-weighted formula that prioritizes more recent price behavior and will keep the Risk Off allocation in shorter duration treasuries if it looks to be the better option.

What TDL does not do

TDL is only active when a strategy is already in its risk-off, defensive position. It has no effect on equity allocations and does not determine when to enter or exit equities — that remains the exclusive domain of the strategy's momentum rules. TDL is purely a safety layer within the treasury sleeve.