Well, here we are again. While investors deal with various aspects of uncertainty, there has been one certainty that continues to come through in the bond market: volatility. Over the last few years, investors have been presented with the age-old fixed income question on many occasions: should I extend duration? In this blog post, I wanted to not only answer that question but also highlight how that strategy has fared and how bond investors can approach their portfolios with a more potentially advantageous solution.

Let’s take a look at the aforementioned volatility, using the benchmark U.S. Treasury 10-Year yield as our guide:

Figure 1: U.S. Treasury 10-Year Yield

• Over the last 18 months or so, the UST 10-Year has reached as high as 5% and fallen to as low as roughly 3.60%.
• During this time frame, swings of 50 to 100 basis points (bps) in a matter of months have become almost commonplace.
• This latest bout of heightened volatility has been on full display since the Fed implemented its first rate cut in mid-September 2024, when the UST 10-Year yield surged almost 120 bps before recently cutting that increase in half.

And now examine how extending duration fared during the period under review:

• UST floating rate notes (FRN), represented by the WisdomTree Floating Rate Treasury Fund (USFR), has seen performance experience a rather steady, ascending trajectory during this bout of heightened bond market volatility.
• UST intermediate to longer-dated duration has borne the brunt of heightened bond market volatility, underperforming UST FRNs in a visible fashion.
• The longer duration play still remains in negative territory even with the most recent rally in the UST 10-Year yield.

Conclusion

In our opinion—geopolitical considerations aside—without signs of labor market cooling and outright economic weakness, it is difficult to envision a continuation of the recent rally in the UST market, specifically in the intermediate to longer-dated portion of the yield curve. In addition, ongoing volatility will more than likely remain a hallmark of bond market activity for the foreseeable future. Against this backdrop, investors should consider Treasury FRNs as a potential solution to take advantage of income potential in a flat, or renewed inverted, yield curve environment, without the volatility. The WisdomTree Floating Rate Treasury Fund provides investors a means of investing in this sought-after space.