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As highlighted in Kevin Flanagan’s recent blog, the Federal Reserve officially initiated a new rate-cutting cycle with a 50-basis-point reduction at the September FOMC meeting, bringing the Fed Funds target range to 4.75%–5.00%.

In the lead-up to this decision, the U.S. Treasury 2-Year/10-Year yield curve un-inverted, entering positive territory for the first time since July 2022.

Figure 1: U.S. Treasury Yield Curves Steepening, with UST 2-Year/10-Year Differential Now in Positive Territory

Meanwhile, another closely watched yield curve, the UST 3-Month/10-Year yield differential, remains in inverted/negative territory. However, the market is pricing in over five additional 25 basis point Fed rate cuts by March 2025, likely pushing both yield curves into positive territory.

Figure 2: U.S. Treasury Yield Curve Differentials: Then, Now, and What’s Ahead

Beyond these specific maturity points, the market is pricing in a yield curve that is much more positively sloped in general six months from today.

Figure 3: U.S. Treasury Yield Curves: Spot (Today) vs. 6-Months Forward Curve

Embedded in these forward curves is the collective view among market participants that the Fed’s dovish outlook will persist and the U.S. economy will remain resilient. Should either one of these come into question, these future expectations could likely shift.

How should investors position their portfolios in this dynamic interest rate environment?

While short-term interest rates are likely headed lower, we remain in a New Rate Regime, and overall bond yields are starting from much higher levels than were observed throughout the prior decade.

Figure 4: U.S. Treasury Yield Curves: Spot (Today) vs. 6-Months Forward Curve

To help manage reinvestment risk and lock in higher yields, we’ve shifted to a neutral duration stance in our model portfolios, recommending that investors explore barbell strategies. This approach enables investors to balance short-term/floating rate strategies with longer term bonds. The result is a portfolio that maintains exposure to the ultra-short end (which we still view as attractive) while limiting any overall interest rate sensitivity mismatch with broader fixed income performance benchmarks.

From a sector standpoint, the resilient economic landscape provides a supportive backdrop for US credit, but spreads have largely priced this in. We remain constructive on quality-screened investment grade and high yield corporate bonds but see better valuation prospects in securitized assets and agency mortgage-backed securities.

Figure 5: Current Fixed Income Strategic Positioning and Outlook

Financial advisors can learn more about the WisdomTree CIO Managed lineup of fixed income and multi-asset Model Portfolios by visiting our Portfolio Solutions offerings.