Monetary Policy2025-11-03
Fed Rate Cuts Accelerate: Bond ETF Rally Set to Continue
With the Fed signaling further rate cuts in Q4 2025, the long-term Treasury ETF TLT surged +3.2% on the week. As the 10-year yield fell to 3.8%, the price appreciation effect of longer-duration bonds is being maximized — making it a good time to review your bond allocation with a rebalancing calculator.
AdminCNBC
At its November 2025 FOMC meeting, the Federal Reserve cut rates by 0.25%, lowering the federal funds rate to 4.25–4.50%. At the post-meeting press conference, Chair Jerome Powell indicated that inflation is approaching the 2% target, the labor market remains stable, and there is room for additional rate cuts. Markets are pricing in an 85% probability of another 0.25% cut in December. Driven by rate-cut expectations, the 10-year Treasury yield fell to 3.8%, down 0.15 percentage points week-over-week. TLT (iShares 20+ Year Treasury Bond ETF) surged +3.2% on the week, bringing its year-to-date return to +18%. IEF (7–10 Year Treasury) rose +1.8% and the broad bond market AGG gained +1.2%, demonstrating that longer-duration bonds are more sensitive to interest rate changes and thus post larger price gains. Investors should use a rebalancing calculator to check whether their bond allocation has risen above target, and use an asset allocation calculator to optimize their duration choice among TLT, IEF, and AGG.
The Fed's Rate-Cut Rationale and the Path Ahead
The Fed's decision to resume rate cuts was driven by several factors. On the inflation front, October core PCE came in at +2.1% year-over-year — close to the Fed's 2% target — as gasoline and food prices stabilized and consumer price pressures eased. On the labor side, October nonfarm payrolls grew by 150,000, beating expectations, while the unemployment rate held steady at 3.9%, reflecting balanced job growth without overheating or a sharp slowdown. Wage growth of +3.8% year-over-year modestly outpaces inflation, supporting real income improvement. Meanwhile, recession concerns mounted as the manufacturing PMI remained in contraction territory at 48.5 and consumer confidence declined, leading the Fed to conclude that further cuts are needed to achieve a soft landing. Markets expect another 0.25% cut at the December FOMC, with the fed funds rate projected to reach 3.75–4.00% by Q1 2026 before the Fed pauses to assess conditions. The estimated neutral rate (terminal rate) is 3.0–3.5%. The pace of cuts will depend on incoming data — a reacceleration of inflation could halt the easing cycle, while a sharp deterioration in employment could warrant a larger 0.50% cut. From an investment perspective, falling rates support bond prices, making it advantageous to increase exposure to bond ETFs such as TLT, IEF, and AGG. TLT's longer duration makes it the most rate-sensitive and offers the highest potential gains in a falling-rate environment, but its elevated volatility requires careful risk management. Using a rebalancing calculator, investors can set a target bond allocation (e.g., 30%) and take profits when rate-driven appreciation pushes the allocation above 35%, simultaneously rebalancing into equities.
TLT Long-Term Treasury ETF Investment Strategy
TLT (iShares 20+ Year Treasury Bond ETF) is the go-to ETF for long-duration U.S. Treasury exposure, investing in bonds with maturities of 20 years or more. With an average maturity of 25 years and a duration of 17 years, TLT's price rises approximately 17% for every 1-percentage-point drop in rates — making it highly sensitive to rate moves. The current yield is 4.5%, providing an income stream, and the expense ratio is a low 0.15%. Year-to-date in 2025, TLT has gained +18%, slightly trailing the S&P 500's +22%, but with significant upside remaining if rate cuts accelerate. The key advantages of TLT are its outsized gains in falling-rate environments — its duration of 17 years is 2–3 times that of IEF (7 years) and AGG (6 years), maximizing rate sensitivity. It also serves as an effective equity hedge, typically surging during recessions: during the 2008 financial crisis, the S&P 500 fell -37% while TLT gained +34%. Additionally, TLT benefits when real rates fall (i.e., nominal rates decline faster than inflation). On the risk side, TLT suffers sharp losses when rates rise — a 1-percentage-point increase in rates translates to a roughly -17% price drop, equivalent to stock-level volatility; TLT fell -31% in 2022 when rates spiked. Long holding periods are essential since selling before maturity can result in losses. Should inflation re-accelerate and halt the rate-cut cycle, TLT's upside would be constrained. Credit risk is absent (U.S. Treasuries), but interest rate and volatility risk are substantial. For strategy, limit TLT to 10–20% of the portfolio to avoid overconcentration. The optimal entry point is early in the rate-cut cycle (when the Fed first begins cutting). Use sharp rate spikes (leading to -10% or more in TLT) as buying opportunities. Combining TLT with IEF and AGG allows for duration management — for example, a TLT 50% / IEF 30% / AGG 20% blend balances rate sensitivity with stability. Using a rebalancing calculator, set a TLT target weight (e.g., 15%) and take profits when rate-driven gains push it above 20%. An asset allocation calculator can simulate portfolio volatility and return across TLT allocations of 10%, 20%, and 30% to identify the right fit for your risk tolerance.
IEF vs. TLT: Choosing the Right Duration
IEF (iShares 7–10 Year Treasury Bond ETF) invests in intermediate-term U.S. Treasuries, offering lower volatility and moderate returns compared to TLT. With an average maturity of 8.5 years and a duration of 7 years, IEF's price rises approximately 7% for every 1-percentage-point rate drop — about half of TLT's sensitivity. The current yield is 4.2%, slightly below TLT's 4.5%, but volatility is roughly half that of TLT. The expense ratio is 0.15%, matching TLT. Year-to-date in 2025, IEF has returned +9%, compared to TLT's +18%, but with similar risk-adjusted returns (Sharpe ratio) given its lower volatility. In terms of rate sensitivity, TLT's duration of 17 years is 2.4 times IEF's 7 years, translating to +17% vs. +7% for a 1-percentage-point rate drop. In terms of volatility, TLT's annualized volatility of approximately 15% is more than double IEF's 7%, putting TLT in stock-like volatility territory. Looking at historical returns from 2020 to 2025: during the rate-decline phase (2020–2021), TLT gained +28% vs. IEF's +12%, with TLT clearly outperforming; during the rate-rise phase (2022–2023), TLT fell -35% vs. IEF's -15%, with TLT's drawdown more than double; and during the rate-stabilization phase (2024–2025), TLT returned +12% vs. IEF's +8%, with the gap narrowing. As a rule of thumb for duration selection: expect a sharp rate decline (recession scenario) → choose TLT for maximum upside; expect a gradual rate decline → choose IEF for moderate returns with lower volatility; uncertain rate outlook → choose IEF to minimize volatility risk. By risk tolerance: aggressive investors (80%+ equities) can use TLT to maximize bond diversification; moderate investors (60% equities) are better served by IEF for stable bond exposure; conservative investors (40% equities) should lean toward AGG or short-term bonds (SHY) to prioritize capital preservation. For blended strategies: TLT 50% / IEF 50% yields a portfolio duration of 12 years, balancing rate sensitivity and stability; TLT 30% / IEF 70% yields a duration of 10 years, reducing volatility while retaining rate-decline upside; IEF 100% alone yields a stable 7-year duration but limits rate-decline gains. Use a rebalancing calculator to set target allocations for TLT and IEF and rebalance when rate moves cause drift; use an asset allocation calculator to simulate long-term returns and volatility across TLT/IEF blends (0:100, 30:70, 50:50, 70:30, 100:0) to find your optimal duration mix.
AGG Broad Bond ETF: The Stability Strategy
AGG (iShares Core U.S. Aggregate Bond ETF) is the core bond ETF for broad diversification across the U.S. investment-grade bond market. Its holdings are diversified across Treasuries (40%), corporate bonds (25%), mortgage-backed securities (MBS, 30%), and other sectors (5%). With an average maturity of 8.6 years and a duration of 6 years — similar to IEF's 7 years — AGG's yield of 4.8% is higher than both TLT (4.5%) and IEF (4.2%), making it an attractive income generator. Its expense ratio of 0.03% is among the lowest of any bond ETF. Year-to-date in 2025, AGG has returned +6%, lagging TLT (+18%) and IEF (+9%), but with the lowest volatility of the three. AGG's main advantages are its diversification (blending Treasuries, corporates, and MBS minimizes sector-specific risk), its stability (at duration 6 years, interest rate risk is roughly one-third that of TLT, and volatility is about one-quarter that of equities), its income (yield of 4.8% exceeds bank deposit rates of ~4%, making it a viable cash substitute), and its ultra-low cost (0.03% expense ratio reduces long-term drag significantly). The key risks are that AGG loses value when rates rise (a 1-percentage-point rate increase causes roughly a -6% decline, though this is far smaller than TLT's -17%), that its gains are limited in sharp rate-decline scenarios (roughly one-third of TLT's gains), and that its 25% corporate bond exposure introduces some credit risk in a recession — though only investment-grade bonds are included, keeping credit risk manageable. For strategy, AGG works well as the core bond allocation at 20–40% of the total portfolio. Conservative investors (e.g., retirees) can increase AGG to 40–50% to prioritize capital preservation, while growth-oriented investors can keep AGG at 10–20% and use TLT for higher rate sensitivity. AGG can also function as a cash substitute — its daily liquidity and higher yield (4.8%) make it suitable for holding emergency reserves. As a rebalancing buffer, AGG can be sold during equity surges to bring stock allocations back in line, and its stability cushions portfolio losses during equity downturns. Use a rebalancing calculator to set an AGG target (e.g., 30%) and rebalance quarterly; use an asset allocation calculator to compare long-term returns and volatility between an AGG-only approach and a blended TLT/IEF/AGG portfolio to find the right balance between stability and growth.
Building a Bond Portfolio and Rebalancing Principles
In a rate-cutting cycle, the key levers are increasing bond allocation and adjusting duration. Age-based bond allocation guidelines: investors in their 40s (aggressive) can hold 20% in bonds — AGG 10%, IEF 7%, TLT 3% — prioritizing growth; investors in their 50s (balanced) can hold 30% in bonds — AGG 15%, IEF 10%, TLT 5% — balancing growth and stability; investors in their 60s (conservative) can hold 50% in bonds — AGG 30%, IEF 15%, TLT 5% — prioritizing stability above all. Duration management: if a sharp rate decline is expected (recession), raise TLT to 20–30% of the bond allocation for maximum upside; if a gradual decline is expected, raise IEF to 50–60% for moderate returns with lower volatility; if the rate outlook is uncertain, raise AGG to 70–80% to minimize volatility. Rebalancing principles: using quarterly review, rebalance when the bond allocation drifts more than ±5 percentage points from target (e.g., if a 30% target rises to 35% due to falling rates, sell the 5% excess and redeploy into equities); using a band approach, maintain the bond allocation within a ±10% band of the target (e.g., a 30% target implies a 27–33% band) and rebalance immediately upon a breach. For new cash inflows, direct funds toward the underweight asset (equities or bonds) to restore the target without incurring trading costs. When rates spike sharply, treat a -5% or more decline in bonds within a week as a buying opportunity for additional purchases. A practical rebalancing example: starting with a KRW 100 million portfolio (equities KRW 70M / 70%, AGG KRW 15M / 15%, IEF KRW 10M / 10%, TLT KRW 5M / 5%), after three months of falling rates — equities +5%, AGG +2%, IEF +4%, TLT +8% — the portfolio grows to KRW 104.45M (equities KRW 73.5M / 70.4%, AGG KRW 15.3M / 14.6%, IEF KRW 10.4M / 10.0%, TLT KRW 5.4M / 5.2%). All assets are within the ±5 percentage-point band, so no rebalancing is needed. After six months of continued rate declines — equities +10%, AGG +5%, IEF +9%, TLT +18% — the portfolio grows to KRW 111.25M (equities KRW 77M / 69.2%, AGG KRW 15.75M / 14.2%, IEF KRW 10.9M / 9.8%, TLT KRW 5.9M / 5.3%). All assets remain within the band, so rebalancing is still not triggered, though TLT's cumulative gain of +18% may warrant consideration of partial profit-taking. Use a rebalancing calculator to set overall bond target allocation (e.g., 30%) and sub-allocations (AGG 15%, IEF 10%, TLT 5%) and check for drift quarterly; use an asset allocation calculator to simulate long-term returns across different rebalancing frequencies (quarterly vs. annual) and duration combinations to arrive at the optimal bond portfolio and rebalancing strategy.
Conclusion
The Fed's accelerating rate cuts present a compelling opportunity for bond investors. TLT offers the highest potential gains in a falling-rate environment but carries equity-like volatility — cap it at 10–20% of the portfolio. IEF delivers moderate returns with lower volatility, making it a suitable 20–30% core bond holding. AGG provides the greatest stability and reliable income, ideal for a 30–40% allocation focused on capital preservation. Use a rebalancing calculator to take profits when bond allocations exceed their targets due to price appreciation, and use an asset allocation calculator to simulate the long-term performance of TLT, IEF, and AGG combinations — helping you select the optimal duration strategy for your individual risk profile.
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