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Monetary Policy2025-09-27

Fed Enters Rate Cut Cycle: Revisiting Bond ETF Strategy and Rebalancing

With the Federal Reserve entering a rate cut cycle, bond ETFs are surging in appeal. Rebalancing strategies that leverage duration differences between Treasury ETFs like TLT and IEF are drawing significant attention.

AdminReuters

The Federal Reserve has entered a rate cut cycle, citing easing inflation and stabilizing labor market conditions. The shift is having a broadly positive effect on bonds — from long-term Treasuries to corporate bonds — with longer-duration bonds benefiting the most. Now is the time to rebalance your stock-to-bond allocation using an asset allocation calculator, and to apply a strategic duration-based allocation within your bond holdings using ETFs like TLT and IEF.

Strong Upside Momentum in Long-Term Treasury ETFs

TLT, which holds Treasuries with maturities of 20 years or more, has a duration of approximately 17 years and is the most sensitive to interest rate changes. In a rate cut cycle, capital gains from rising bond prices can significantly outpace dividend income, making TLT attractive from a total return perspective. However, its volatility is comparable to equities, so it's important to use a rebalancing calculator to determine an appropriate allocation and make regular adjustments.

Balanced Positioning with Mid-Term Treasury ETF IEF

IEF holds Treasuries with 7–10 year maturities and has a duration of roughly 8 years, offering a more stable risk-return profile compared to TLT. It captures a meaningful benefit from falling rates while limiting downside exposure if rates rebound, making it well-suited as a core bond holding. In volatile markets, increasing the weight of IEF relative to TLT can contribute to overall portfolio stability.

Broad-Market Exposure Through AGG ETF

AGG holds the full spectrum of U.S. investment-grade bonds — including Treasuries, corporate bonds, and mortgage-backed securities — providing comprehensive exposure to the bond market. With a duration of around 6 years, it offers moderate interest rate sensitivity, and additional gains from tightening credit spreads can be expected. For investors new to bonds or those who prefer a simpler portfolio, a single allocation to AGG can provide sufficient diversification.

Building an Optimal Bond Portfolio Through Rebalancing

During a rate cut cycle, a blend of TLT 30%, IEF 50%, and AGG 20% can strike a solid balance between return potential and stability. Use a rebalancing calculator to monitor deviations monthly or quarterly, and apply a band approach that triggers rebalancing when any position drifts more than ±5%. During periods of heightened rate volatility, increasing rebalancing frequency is key to managing portfolio risk.

Conclusion

The Fed's rate cut cycle presents a compelling opportunity for bond ETFs. Understanding the duration differences between TLT and IEF, dynamically adjusting allocations based on market conditions, and incorporating the diversification benefits of AGG all point to the need for a comprehensive approach. Use a rebalancing calculator and asset allocation calculator to build a disciplined bond investment strategy and maximize the benefits of the rate cycle.

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