Fund managers cutting risk exposure to US Treasuries

By Stuart Fieldhouse
22nd December 2025

Related topics: Federal Reserve, Interest rates, Treasuries, CG Asset Management

Fund managers cutting risk exposure to US Treasuries

Bond markets are relearning an old lesson: not all slowdowns look like recessions, and not all inflation fades on cue. In recent weeks fund manager CG Asset Management said it has adjusted its portfolios on the assumption that America’s next macro chapter will be defined less by collapse than by discomfort.

The firm has cut the duration of its Treasury Inflation-Protected Securities (TIPS) exposure sharply, betting that steeper yield curves (and the forces behind them) are here to stay.

The move reflects a view that the world’s largest economy is drifting towards stagflation: slower growth combined with stubbornly high inflation. That is a different beast from the deflationary recessions to which bond investors have become accustomed over the past two decades. In such an environment, long-dated bonds are less a refuge than a liability.

US inflation is looking sticky

Inflation, for one thing, has proved remarkably sticky. America’s preferred gauge, core PCE inflation, has remained above the Federal Reserve’s 2% target since mid-2021. History suggests this persistence is not unusual. The IMF has long noted that inflation shocks tend to linger, outstaying policymakers’ hopes. Yet tolerance for above-target inflation has grown.

With unemployment only gently rising and growth still running above trend, the Fed has begun cutting short-term rates anyway. The risks to its dual mandate now appear more symmetrical: inflation at 3% is no longer treated as an emergency.

Politics reinforces this leniency. Donald Trump’s administration has been explicit in its preference for lower interest rates, and fiscal policy remains expansive. America’s deficit, already around 6% of GDP, is set to widen further as Trump-era tax cuts are renewed. Government debt exceeds 100% of GDP on both nominal and market-value measures. These are not numbers that inspire confidence among long-term creditors.

Central banks losing appetite for duration

Indeed, demand for long-dated Treasuries is becoming less reliable. The Treasury Borrowing Advisory Committee has warned that “price-insensitive” buyers (such as foreign central banks) are losing their appetite for duration. Despite earlier hints at reform, the Treasury plans to maintain its coupon issuance while leaning more heavily on short-term bills. The result will be a shortening of the government’s average debt maturity: a tacit admission that long bonds are becoming harder to sell without concessions.

Markets have taken note. Yield curves across developed economies have steepened as investors focus less on central banks’ near-term rate cuts and more on longer-term questions of fiscal sustainability, debt burdens and inflation credibility. Legal uncertainty adds another twist. America’s Supreme Court is expected to rule on the legality of reciprocal and fentanyl-related tariffs. A judgement against the administration could weaken confidence in policy coherence, a risk that shows up most clearly at the long end of the curve.

Shorter duration bonds offer shelter

For CG Asset Management, the implication is clear. The firm has reduced the duration of its TIPS holdings from eight years to 4.5 (well below the index) on the view that the balance of risks has shifted. The politically tolerable way out of excessive debt, it argues, is financial repression: a prolonged period of negative real interest rates. That can be engineered either by recession, prompting central-bank stimulus, or by a bond-market crisis, forcing the authorities to intervene as buyers of last resort. The odds of the former have diminished; those of the latter have risen. In such a crisis, long-dated bonds would suffer heavy capital losses before repression eventually sets in. Shorter duration offers shelter in the meantime.

The logic extends beyond America. In Britain, where fiscal sustainability is also in question and pension funds are retreating from the gilt market, CGAM keeps duration well below the index. Yet valuations matter. With a 10-year inflation-adjusted yield of about 1.9% against trend growth nearer 1.3%, Britain looks better value than America, where the same real yield merely matches trend growth.

The era of ever-flatter curves, it seems, has passed. Governments borrow more, voters tolerate inflation and investors demand compensation for uncertainty. Steepness, once a cyclical curiosity, may now be a structural feature of the bond market’s landscape.