When thinking of the best debates, most people think of Apple vs. Android or Target vs. Walmart, while debates about bonds are usually the last thing on people’s minds. However, fixed income has seen renewed optimism with the Fed cutting rates for the first time this year, making the debate between short and long duration increasingly relevant.

Long-duration bonds are more sensitive to changes in interest rates, making them more prone to sharp movements. Bond volatility has been high since 2020, driven by some of the sharpest hikes and cuts in Fed history. Long-duration treasury fund TLT holds an RRisk of 1.10, meaning it’s exhibited 10% more volatility than the S&P 500 over the last three years. Meanwhile, the iShares Barclays 20+ Year Treasury Bond ETF (TLT) is down 42.9% since the end of 2020 as rates rose from near-zero levels. The market has gained more clarity on the path of interest rates, seeing the market’s gauge of rate volatility hit multi-year lows. The ICE BofA MOVE Index (MLMOVE), or the “Vix for bonds,” measures the expected volatility of treasury rates. The index recently fell below its lowest levels since early 2022. With the bond market finding more stable footing, long-duration bonds could return to their historical norm of lower volatility than equities.

A recent drop in rates has pushed the Long Duration US Treasury group ahead of Short Duration Treasury within DALI. Since the start of September, the Long Duration group has picked up 13 signals while the short duration group has lost 9. The Long Duration group now sits 10 signals above Short Duration. However, there are still some relationships yet to move in favor of long duration bonds.

The total return RS chart between the iShares Barclays Short Treasury Bond ETF (SHV) and TLT has been a reliable indicator of duration preference. Following the RS signals would have doubled the growth of either TLT or SHV including dividends, while a reversal strategy outperforms both funds. While the chart still favors SHV, TLT is close to reversing into Xs, and its 2% chart already reversed in favor of long-duration treasuries. Given the chart’s consistency, it is worth keeping an eye on for confirmation of strength.

While the uptick in long-term treasuries has been notable, it hasn’t only been government bonds moving. Within Asset Class Group Scores, the broader US Long Duration group has a score of 2.68, rising above the 2.55 score of US Short Duration for the first time this year. Long Duration also holds a 1.04 score direction while Short Duration is at negative 0.81, demonstrating that the two groups have been moving in opposite directions.

Broadly speaking, fixed income continues to lack long-term strength, but recent developments do offer some optimism for improvement. Given the presence of bonds in most client portfolios, the battle between long and short duration should be an area to monitor in the coming months, but long duration appears to have taken an initial lead.

As expected, the Federal Open Market Committee (FOMC) lowered the federal funds rate by 25 basis points on Wednesday, bringing the target rate to 4 – 4.25%. This rate cut was somewhat unusual as it comes with US equity indexes trading near all-time highs. The Fed typically eases monetary policy in response to economic weakness, so rate cuts often come during relatively weak markets. In fact, over the last 35 years, where have only been a handful of times when the Fed has cut rates when the S&P was within 1% of an all-time high.

Overall, when the Fed cuts rate when stocks are near all-time highs, equities have generally performed well over the next year. As the table below shows, since 1990, every time the fed has cut rates when the S&P was within 1% of its all-time high, the index was higher one year later, with an average gain of a little over 12%. However, we can also see that the average six-month performance is negative, with a couple of significant drawdowns. One of these was near the bottom of the COVID crash and an argument can be made that it has little to do with the pre-existing state of the market or the economy. That being said, it isn’t entirely surprising that we would see a short-term dip in these scenarios – with the market near all-time highs and signs of a slowing economy inducing the fed to cut rates.

In addition to the rate decision, the FOMC also released an updated state of economic projections (SEP) at this meeting. The SEP showed that FOMC members had lowered their projections for the level of the fed funds rate for 2025, 2026, and 2027. The new projection for the fed funds rate in 2025 – 3.6% - implies that we could see two additional 25 bps cuts this year; and the fed futures market is now pricing in a better than 90% chance of another cut next month and about an 80% chance a third cut in December.

The 10-year US Treasury Yield Index (TNX) closed higher on Wednesday and was up again on Thursday; but FOMC members’ projections that short-term rates will be about 1% lower by 2027 could help fuel additional strengthening in the core US fixed income market, which has been improving over the last several weeks.

The loosening of monetary policy has the potential to be a tailwind for both equities and core fixed income, however, there is one potential wild card. In the SEP, FOMC members also raised their projections for GDP growth in 2025 – 2027 and lowered their projections for the unemployment rate, in 2026 & 2027, which is not what you might expect when the committee is lowering rates. One explanation is that members believe that their policy adjustment will drive improvement in the economy and labor market. However, some commentators have recently discussed concerns about the Federal Reserve’s independence as a possible risk factor for the market and the seeming disconnect between the FOMC’s economic projections and policy action could lend credence to those concerns.

Daily Option Ideas for September 18, 2025