Bessent: Belly of curve is most interest to asset managers

Bessent: Belly of curve is most interest to asset managers

The belly of the yield curve has become a focal point for asset managers, as it offers a sweet spot for higher yields adjusted for the risk of holding longer maturities. According to Darcy Briggs, a senior vice-president and portfolio manager with Franklin Templeton Canada, the belly of the curve, which lies between short- and long-term maturities, typically provides better risk-adjusted returns [1].

The yield curve, a graphical representation of yields at different maturities, has been a moving target for bond managers. A year and a half ago, when the yield curve was inverted, short-term maturities were the most attractive. However, with the yield curve reverting to a normal trajectory, the sweet spot has shifted to the belly of the curve [1].

The yield curve’s steepness, measured by the difference between the two-year yield and the 10-year yield, was recently about 73 basis points in favor of the longer end. This falls within the 50 to 150 basis-point range of a normal yield curve, though currently less than the median level of 100 [1].

Grant Connor, portfolio manager at CI Global Asset Management, believes the best risk-return tradeoff is currently in the five-year area of the curve. This part of the curve offers enough duration to benefit from any central bank easing while avoiding the elevated volatility and downside risk of the long end of the curve [1].

Bond yields are currently attractive, with real, after-inflation yields exceeding 2%, particularly at the 10-year level. Ashish Dewan, senior investment strategist at Vanguard Investments Canada Inc., noted that this increases the return potential and makes higher quality bonds well-equipped to serve as portfolio hedges in the event of falling stock markets [1].

Looking ahead, the CI managers believe the five-year part of the yield curve is expected to remain the anchor for risk-efficient positioning over the next six to 12 months. However, central bank cuts might present an opportunity to extend duration if the yield curve steepens [1].

In the context of an overall fixed-income portfolio, the sweet spot is only one element of portfolio construction. Dewan recommends diversification into international bonds outside North America, citing differences in central bank policies and uncertainty around U.S. policy as significant risks for many investors [1].

The sweet spot will also vary depending on the investment objectives and risk tolerance of individual investors. In a more conservative portfolio, longer-term investors should consider holding mostly fixed-income securities with an emphasis on short-term corporate credits. Risk-tolerant investors with a longer-term horizon can take on more duration risk by holding longer-dated securities [1].

Active duration management is essential for optimizing returns. For example, the CI Global Unconstrained Bond Fund has recently increased its duration from very short-term positioning to 5.5 to six years, reflecting the normal, upward-sloping yield curve [1].

By accepting somewhat higher credit risk, actively managed ETFs can generate higher yields with less duration risk. Franklin Canadian Core Plus Bond Fund, for instance, maintains a large overweighting in high-quality corporate securities while holding far less in federal bonds than its market benchmark [1].

In conclusion, the belly of the yield curve has emerged as an attractive segment for asset managers seeking to enhance returns in their bond mandates. By identifying and tilting their portfolios towards the sweet spot, investors can materially enhance returns while managing risk effectively.

References:
[1] https://www.investmentexecutive.com/news/research-and-markets/the-yield-duration-sweet-spot/
[2] https://www.marketbeat.com/instant-alerts/filing-strategy-asset-managers-llc-invests-494000-in-apollo-global-management-inc-nyseapo-2025-08-07/