A position sensor (10) is made by assembling a permanent magnet (14), a soft magnetic layer (16) on the magnet (14), a magnetoresistive sensor element (18) on the soft magnetic layer (16), and a toothed ferritic member (20) mounted for movement past the sensor element (18). The permanent magnet (14) is surface-treated to form, in situ, the soft magnetic layer (16) comprising a thin layer of high-permeability, low-coercivity material. An Nd-Fe-B alloy magnet (14) is surface-treated by a laser or electron beam to melt a thin layer (16) which is then cooled to re-solidify into a soft magnetic material. Rapid cooling achieves an amorphous surface layer having the desired properties. Slow cooling results in the formation of alpha-iron grains which enhance the soft magnetic properties. Iron formation is aided by reacting the molten layer with an oxidizing atmosphere. Iron alloying by adding iron powder to the molten layer is also feasible.