Markov Regime Switching Risk-On/Risk-Off Model for Treasuries
Data from FRED as of 30 Sep 2025. In this post we explain the use of Markov Regimes Switching Risk-On/Risk-Off Model (MRS) for Treasuries. The characteristics of Debt securities as an asset class are very different from Equities- the issuers and holders of Debt securities, the way they are traded, the role of liquidity, the importance of persistence and duration in yields- all make risk-on/risk-of models useful. Markov-type models with their wide scope for modifications e.g. Hidden Markov, Semi Hidden Markov; and enhancements are very well suited to this task. In this post we will show the current state of risk for different tenors of Treasuries. We also have a supplementary paragraph to show why Money Market Funds are low -risk. Methodology We model regime shifts in Treasuries using price-based, weekly slope signals rather than raw yields. Using prices (and their derived yield differences) ensures direct linkage to investor gains and losses, while avo...