Bond investors are moving toward slightly riskier positions as they prepare for what many see as an extended pause in the Federal Reserve's rate-cutting cycle. That shift is being driven by a combination of a still-resilient U.S. economy and proposed fiscal measures expected to bolster consumer spending this year.
The Federal Open Market Committee (FOMC) is broadly anticipated to leave its policy rate unchanged in the 3.50%-3.75% target range at the conclusion of its two-day meeting on Wednesday. The committee had previously trimmed the benchmark rate by 25 basis points at its September, October and December meetings after a nine-month pause.
Beyond any tone Fed Chair Jerome Powell adopts at his post-meeting news conference about the tempo of future rate cuts, market attention is likely to shift toward succession at the central bank. BlackRock's bond chief Rick Rieder has emerged as the odds-on favorite to replace Powell in May, with Polymarket assigning him a 49% chance of taking the role.
Portfolio moves: Duration and selective credit
Ahead of the Fed decision, many fixed-income managers have increased duration exposure or purchased longer-maturity U.S. Treasuries, while remaining opportunistic in higher-quality corporate credit. Extending duration - moving into five- to 30-year Treasuries - is being used to capture higher long-term yields ahead of expected rate cuts.
Duration, measured in years to maturity, indicates a bond's sensitivity to interest-rate changes. Increasing duration is generally seen as a more risk-seeking posture because longer-dated securities carry greater vulnerability to shifts in the economic and interest-rate outlook.
Market participants continue to bet on a shallow easing cycle from the Fed as labor-market metrics remain steady, inflation shows signs of having peaked, and the fed funds rate approaches what investors consider a neutral level - a stance viewed as neither stimulative nor restrictive.
Tony Rodriguez, head of fixed income strategy at Nuveen, argued that when new policy changes - such as tax cuts and the delayed effects of prior Fed rate reductions - are factored into the outlook for the coming quarters, "a pause makes a lot of sense."
U.S. rate futures currently embed about 44 basis points of easing for 2026, equivalent to under two 25-basis-point cuts. That expectation has eased from roughly 53 basis points two weeks earlier.
Valuations constrain bold bets
Although the macro backdrop supports a cautious return to risk-taking, stretched valuations in U.S. credit markets have restrained more aggressive moves. John Flahive, head of wealth investment solutions and co-head of municipal bonds at Insight Investment, said his firm is advising clients to move out of cash but to avoid being overly aggressive within fixed-income allocations because valuations are not supportive.
Investment-grade corporate spreads have continued to compress and now sit at historically narrow levels. The ICE BofA U.S. Corporate Index shows IG spreads at about 73 basis points over Treasuries, close to the tightest readings seen since the late 1990s. That pressure reflects strong demand for higher-quality corporate debt while leaving limited room for yield-seeking investors.
Christian Hoffmann, head of fixed income at Thornburg Investment Management, cautioned that geopolitical relations represent a significant risk. He noted that the ongoing accumulation of gold in central bank reserves is partly motivated "by a desire to diversify away from U.S. debt ... because people have long-term concerns about our fiscal position."
Evidence of longer-duration positioning
Recent data point to an uptick in long-duration bets. J.P. Morgan's latest Treasury Client Survey recorded the highest net long positions among its clients since mid-December. The pattern fits established investor behavior: during Fed easing cycles, yields on shorter maturities tend to fall first, prompting a move further out the curve to lock in comparatively higher long-term yields.
Longer-duration Treasuries have historically outperformed shorter-duration counterparts during periods of Fed rate cuts, making an extended curve a compelling reason to add duration. Vishal Khanduja, head of the broad markets fixed income team at Morgan Stanley Investment Management, said a steeper yield curve - where longer-term yields are higher than short-term rates - creates an incentive to extend duration because it offers higher yields relative to money-market returns.
"What you're getting on your money market is lower than what you're getting for the five- to the 10-year part of the yield curve," he said. "Extending out gives you that steepness ... so higher yields and steeper curves allow you to get paid."
Limits to risk appetite
Outside of adding duration, many bond investors see limited opportunity to take substantially more risk. While the current administration has proposed measures aimed at boosting consumer spending - including a 10% interest rate cap on credit cards and tax cuts - there is skepticism about how much fiscal space exists to fully implement those plans.
George Catrambone, head of fixed income in the Americas at DWS, said that given the current level of deficits, "The U.S. is not in a position to have additional fiscal stimulus based on where deficits currently sit." He added there is uncertainty about how durable any initial stimulus would be, and cautioned against venturing into deeply distressed credit.
As a result, many portfolio managers are trimming cash holdings and modestly increasing exposure to longer-term Treasuries and select corporate bonds, while avoiding the lowest-rated credits. The prevailing stance is one of measured risk-taking in a market where yield-seeking incentives are balanced by tight valuations and geopolitical and fiscal uncertainties.
Implications for markets
The net effect is a fixed-income market that is tilting toward longer maturities and higher-quality corporate debt, with investors positioning for a gradual easing path while protecting against potential shocks from valuation extremes or geopolitical developments. Market pricing changes for 2026 easing, compressed IG spreads and a renewed interest in long-duration securities underscore a cautious recalibration of risk across bond portfolios.