A Shifting Backdrop
In the wake of the Federal Reserve’s retreat from its aggressive rate-hiking campaign, many believe that the Fed will initiate further moderate rate cuts from here, gradually reducing the yields provided by money market funds.
For those interested in enhancing yield while taking only limited interest rate risk, short-duration fixed income may provide an appealing balance of risk and return potential.
Is Now the Time?
How can you gauge whether this is a good time for short duration? Look at their common proxy, the two-year Treasury yield, along with the spread between two-year and 10-year Treasuries.
Although off from recent highs, short-duration Treasury yields remain elevated versus pre-2022 levels. At the same time, 10-year Treasuries provide little yield advantage over two-year Treasuries despite the latter’s lower interest rate risk profile and more modest volatility levels.
Yields on Short Durations Are Comparable to More Volatile Longer Bonds
2-Year U.S. Treasury Yield (%)
10-Year Minus 2-Year U.S. Treasury Spread (%)
Source: Bloomberg, as of February 26, 2025.
Moving Ahead
Many investors remain reluctant to move out of cash, but a change to achieve a greater yield profile doesn’t have to involve inordinate risk. Short duration, whether in investment grade, high yield or overseas markets, may be worth a look.
