From Cash to Core: Redeploying Dry Powder as the Curve Normalizes

The rate backdrop has shifted again. The 30-year US Treasury now yields roughly 4.8%, while short-dated bills and the 2-year note range around 3.5–3.75%. After several years of inversion, the curve is back to a more traditional, upward-sloping shape. Investors are finally being paid a term premium for extending duration.

At the same time, housing affordability has become a political and policy priority. The Trump administration has repeatedly highlighted the need to lower the cost of homeownership and to this end has repeatedly expressed a desire for lower long-term interest rates. While the Federal Reserve remains independent, and markets largely set longer term bond prices, this backdrop argues for a clear policy bias toward a flatter yield curve. While that doesn’t eliminate the risk of a longer dated back-up, it helps bound the probability of a severe bear-steepening from here.

For bond investors, the combination of positive slope plus a policy preference for lower rates makes longer dated fixed income a more attractive risk tool than it has been in years. As the attached exhibit on “rolling down the yield curve” illustrates, the total return from longer dated bonds is more than just today’s yield. When the curve slopes upward, a bond that starts at the 30-year point and “rolls” down to 29 or 28 years will see its required yield fall, generating capital gains on top of coupon income, so long as the curve’s level and shape remain broadly intact.

In our recent note, Mitigating Risk in a Bond Portfolio: Why Valuation Discipline Matters, we argued that many risk assets now look expensive, and that investors should focus on risk-management rather than stretching their risk budgets for income. With the Fed already cutting the policy rate into the 3.25–4% range, short-end yields are resetting lower. That means cash and money market investments will reprice down accordingly, even as the long end continues to offer yields approaching 5% and a positive roll-down profile.

In this environment, we see intermediate and long investment grade fixed income as an effective tail risk hedge in asset allocation models. High quality bonds now provide:

• A higher starting yield than the front end.

• Structural “roll” return from an upward-sloping curve.

• Diversification and downside protection if growth slows or credit spreads widen.

At Curasset, we are implementing these views by maintaining disciplined but meaningful duration exposure in our core strategies, and by pairing that interest-rate hedge with careful valuation discipline in our credit selection process. For advisors and allocators with large cash balances, the opportunity is to move from cash to core in a way that both earns more than bills and re-introduces duration as a prudent hedge inside client portfolios.