Wall Street traders are not changing their minds. At BlackRock, PGIM, and Morgan Stanley, bond managers are still buying mid-curve Treasuries even as the Federal Reserve’s plan gets harder to read.
They’re betting on the same trade that worked all year—sticking to bonds maturing in about five years. These are the bonds giving solid returns while being less sensitive to sudden shifts in interest rates.
The Fed’s first rate cut in nine months came on Wednesday. Chair Jerome Powell said it was “a risk management cut,” adding that more changes would depend on what happens in upcoming meetings.
This message caused yields to go up across the board and killed hopes for a faster pace of cuts. Some traders who were hoping for a bigger move started closing positions. But many others stayed right where they were. The ones in the middle of the curve didn’t move at all.
BlackRock and PGIM target the belly for carry and cushion
BlackRock’s deputy chief investment officer for global fixed income, Russell Brownback, said the focus is still on the five-year part of the curve. “The belly is the sweet spot,” he said. It’s been one of the best performers this year. A Bloomberg index tracking 5- to 7-year Treasuries shows a return of 7%, better than the broader bond market’s 5.4% gain.
Greg Peters, co-chief investment officer at PGIM Fixed Income, explained why. These mid-curve Treasuries pay enough interest to make money even when using borrowed funds. That’s called positive carry. And as the bonds get closer to maturity, their value goes up. “Positive carry and roll: it’s the bond investor’s dream,” he said.
The Fed’s decision came as signs of economic weakness kept building. Job growth slowed down in recent months, and companies are still reacting to President Donald Trump’s ongoing trade war. At the same time, his tariff increases risk pushing prices even higher. Inflation is already stuck above the Fed’s 2% target. That’s why Powell said future decisions would be made “meeting by meeting.” Nothing is guaranteed anymore, and everyone knows it.
Mid-curve bonds hold ground while short bets unwind
Christian Hoffmann, a portfolio manager at Thornburg Investment Management, said the market doesn’t know how to read the Fed anymore. “It’s increasingly difficult to draw a straight line from the evolution of the data to the Fed’s reaction,” he said. He expects lower rates long term, but he’s also prepared for more confusion in the near term.
The Fed’s own projections show possible quarter-point cuts over the next two meetings. But after that, only tiny changes are expected in 2026 and 2027.
Traders in the futures market are betting on more. The disconnect is already affecting trades. At Natixis, the strategy team shut down their long two-year Treasuries position right after Powell’s press conference.
Andrew Szczurowski, who runs the $12 billion Eaton Vance Strategic Income Fund at Morgan Stanley, thinks the market is closer to reality than the Fed’s guesses. His fund returned 9.5% this year, beating 98% of peers.
He believes the Fed will try to protect jobs by keeping rates low. That would help Treasuries rise further. “You missed some of the rally, but there’s still upside,” he told his clients. “It’s a bond picker’s market.”
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