Monetary Policy2025-11-11
Treasury Yields Rise Amid Uncertainty Over Fed's Rate Path
The 10-year Treasury yield has climbed above 4.5%, pushing the bond market into a downturn. With the Fed signaling a slower pace of rate cuts, TLT and IEF investors need to reassess their duration strategies.
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The US 10-year Treasury yield surged to 4.52%, jumping 0.28 percentage points over the past two weeks. The primary driver was the November FOMC minutes, in which the Fed cited concerns over a potential reacceleration of inflation and persistent labor market strength, hinting at a more measured pace of rate cuts. The 30-year yield also climbed to 4.72%, dragging the long-duration bond ETF TLT down 3.8% over the past two weeks, while the intermediate-term IEF fell 1.9%. By contrast, the broad-market bond ETF AGG declined only 1.2%, cushioned by its shorter duration. Bond investors should use an asset allocation calculator to reassess rate-hike scenarios and a rebalancing calculator to shorten duration exposure.
Fed Rate Path and Market Reaction
In the November FOMC minutes, Fed officials emphasized the need to slow the pace of cuts following consecutive 25 bp reductions in September and November. Chair Powell reiterated a data-dependent approach at the press conference, acknowledging that inflation is moving toward the 2% target but that the path may be uneven. Recent economic data paint a mixed picture: October CPI reaccelerated to 2.6% year-over-year from 2.4% in September, core CPI remains well above target at 3.3%, and shelter and services inflation continue to be sticky. On the labor front, October nonfarm payrolls came in at 150,000 — below the 180,000 consensus — yet unemployment held at a low 3.9% and average hourly earnings rose 4.1% year-over-year, keeping wage inflation pressure alive. In terms of market rate expectations, the probability of a December FOMC hold has risen to 45% on the FedWatch tool, the anticipated number of additional cuts through June 2025 has been revised down from two to one, and the terminal rate forecast has shifted up from 3.50–3.75% to 3.75–4.00%. In the Treasury market, the 2-year yield climbed to 4.35% on diminished cut expectations, the 10-year printed at 4.52% on longer-term inflation concerns, and the 2s10s spread narrowed to 0.17 pp as the curve continues its normalization.
Duration Risk Analysis for Bond ETFs
Rising rates hit longer-duration bonds harder. TLT (20+ year Treasuries) carries a duration of 17.2 years, implying roughly a 17.2% price decline for every 1% rise in yields. The 0.28 pp yield increase over the past two weeks produced a loss of approximately -4.8%, leaving TLT down -2.3% year-to-date. Should yields rise further, a 0.5 pp move implies -8.6% and a 1.0 pp move implies a steep -17.2% loss — losses that the current 4.2% dividend yield cannot offset. IEF (7–10 year Treasuries) carries a duration of 8.1 years, implying roughly an 8.1% price decline per 1% yield rise. Its two-week loss of -2.3% is more contained than TLT's, and IEF is up +1.8% year-to-date. Additional yield increases of 0.5 pp and 1.0 pp would produce losses of roughly -4.1% and -8.1%, respectively, though the 4.0% dividend yield offers some recovery potential over the medium term. AGG (broad bond market) carries a duration of 6.2 years, implying roughly a 6.2% price decline per 1% yield rise. Its two-week loss of -1.4% is the most contained of the three, and AGG is up +2.9% year-to-date. Further yield increases of 0.5 pp and 1.0 pp would produce losses of roughly -3.1% and -6.2%, but the blend of corporates and MBS provides meaningful diversification, and the 3.8% dividend yield delivers stable income. As a selection guide: when worried about rising rates, raise AGG to at least 50%; when the rate direction is uncertain, anchor the portfolio on IEF for intermediate duration; limit TLT to no more than 10% unless you have high conviction that rates will fall.
Bond Portfolio Rebalancing Strategies
Shortening duration is the key priority in a rising-rate environment. For a conservative 60/40 portfolio previously structured as SPY 60% / TLT 25% / IEF 15%, the adjusted allocation becomes SPY 60% / AGG 25% / IEF 10% / short-term bonds & cash 5%. This involves selling all TLT and rotating into AGG, reducing average portfolio duration from 17 to 7 years, and holding 5% in cash to have dry powder for any further rate increases. For a balanced strategy previously structured as equities 50% / TLT 20% / IEF 20% / AGG 10%, the adjusted allocation becomes equities 50% / IEF 20% / AGG 25% / short-duration corporate SUSL 5%. TLT is redistributed across IEF and AGG, bringing duration down from 12 to 7.5 years; the addition of SUSL targets credit-spread income; and a rebalancing calculator should be used monthly to keep allocations within ±3% of targets. For an aggressive strategy previously structured as equities 70% / TLT 15% / IEF 10% / cash 5%, the adjusted allocation becomes equities 70% / AGG 15% / high-yield HYG 5% / cash 10%. TLT is fully liquidated and replaced with AGG, a 5% high-yield sleeve is added for yield enhancement with managed credit risk, and cash is raised to 10% for volatility protection and opportunistic buying. A phased transition approach is recommended: Step 1 — immediately sell 50% of TLT and rotate into AGG; Step 2 — two weeks later, replace the remaining 50% of TLT with IEF or AGG; Step 3 — one month out, review the rate trajectory and finalize the target allocation. Phased rebalancing reduces timing risk compared to an abrupt full rotation.
Rate Scenario Strategies
Scenario 1: Rates rise an additional 0.5–1.0 pp (probability: 40%), triggered by reaccelerating inflation or a hawkish Fed pivot. Bond strategy: raise AGG to at least 50%, fully exit TLT, and bring short-term bonds (1–3 year maturities) up to 20%. Equity strategy: allocate 15% to rate-sensitive financials XLF, add 10% to energy XLE, and trim technology from 40% to 30%. Scenario 2: Rates move sideways, ±0.2 pp around current levels (probability: 35%), driven by mixed economic data and a wait-and-see Fed. Bond strategy: anchor around IEF at 30%, complement with AGG 30% + TLT 10%, and use a rebalancing calculator for quarterly adjustments. Equity strategy: pursue balanced sector diversification with technology 30% / healthcare 20% / financials 15%, allocate 20% to dividend growers SCHD and VIG, and hold 5% in REIT VNQ as an inflation hedge. Scenario 3: Rates fall 0.3–0.5 pp (probability: 25%), triggered by slowing growth signals and a dovish Fed pivot. Bond strategy: raise TLT to 30% to maximize capital gains, complement with IEF 30% + AGG 20%, and extend portfolio duration to 12–15 years. Equity strategy: tilt toward growth with QQQ 30% and TQQQ 5%, raise XLK to 35%, and pare defensives to below 20%. Use an asset allocation calculator to blend these three scenarios at their respective probabilities — 40%, 35%, and 25% — to compute the expected return and build a portfolio suited to your risk tolerance.
Tax Efficiency and Currency Hedging for Bond ETFs
On the tax side, US ETF dividends are subject to a 15.4% withholding tax at source, and total dividend income exceeding KRW 20 million annually is subject to comprehensive taxation. Capital gains from overseas equities are exempt up to KRW 2.5 million per year; amounts above that threshold are subject to a 22% separate tax. For tax efficiency: hold AGG — which is predominantly income-oriented — in tax-advantaged accounts such as an ISA or pension account; hold TLT and IEF — which are more capital-gains-oriented — in taxable accounts to utilize the KRW 2.5 million exemption; and offset stock capital gains against bond capital losses to reduce the overall tax burden. On currency hedging: an unhedged position allows currency appreciation to add to bond returns (e.g., a 3% AGG return plus a 5% KRW depreciation yields an 8% total return), but currency weakness amplifies losses (e.g., a -5% TLT loss combined with a -5% KRW appreciation yields a -10% total loss); for long-term investors, exchange rate fluctuations tend to average out, reducing the cost of hedging. A hedged position eliminates currency risk and captures pure bond returns (e.g., a 3% AGG return less a 1.2% hedging cost yields a stable ~1.8%), suits short-term investors wary of currency volatility, and is most appropriate when KRW weakness is a concern. Recommended hedge ratios: 70–80% for AGG, since stability is the primary objective and minimizing currency volatility is preferable; 50% for TLT and IEF, pursuing capital gains while keeping currency risk in check. Consider a dynamic hedging strategy: reduce the hedge ratio to 30% when USD/KRW is above 1,350, and raise it to 80% when USD/KRW is below 1,250. Evaluate the cost-versus-benefit of hedging quarterly using a rebalancing calculator.
Conclusion
With Treasury yields rising, duration management is essential for bond ETF investors. Minimize exposure to TLT given its elevated interest rate risk, maintain a balanced position through IEF's intermediate duration, and use AGG as the stable core of your bond allocation. Use an asset allocation calculator to simulate returns under different rate scenarios, and a rebalancing calculator to optimize duration and currency hedge ratios.
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