FTSE Russell Insights

Time to leave US Treasuries for the duration?

April 02, 2025

8 min

Robin Marshall

Director, Global Investment Research, FTSE Russell

We examine why US spreads haven’t tightened during recent Fed easing and why the WGBI outperformed the WGBI-x US, when the Fed raised rates, perhaps because of Treasuries’ shorter duration and convexity. But that may be a disadvantage if duration becomes the investor’s friend in 2025-26.

Our Insight assesses recent spread moves and performance of US Treasuries, pointing out that Treasuries were helped by their short duration, when yields rose in 2023-24, despite spreads widening, enabling the WGBI index to out-perform WGBI ex-US.
US Treasury spreads have barely tightened since the Fed began easing in September, challenging previous cyclical patterns.
Significantly greater duration and convexity of European and UK govt bond markets versus Treasuries would also favour them, in the event easing cycles do gather pace in 2025-26.

Greater global divergence in growth, inflation and debt levels has delivered less predictable sovereign spreads in major markets. For example, US Treasury spreads versus the WGBI (ex.US) generally moved pro-cyclically after the GFC, rising during economic upswings, when the Fed generally tightened policy first, and more rapidly, and then falling sharply in downswings or after deflationary shocks, like the GFC and Covid, when the Fed usually led easing and tightening cycles. But US spreads haven’t declined overall in the easing cycle to date, they are close to the levels when the Fed first cut rates in September, 2024, or a little wider, as Chart 1 shows, even after the recent mini-flight to quality on tariff uncertainty.

Source : FTSE Russell, data to March 4, 2025. Past performance is no guarantee of future results.

Stronger US economic growth, sticky inflation and “higher for longer” US rates may have been key factors in the recent spread widening. But another key driver could be the US enacting tax cuts in 2017-18, followed by infrastructure spending. Foreign holdings of US Treasuries have also fallen sharply as a share of the total since 2013, with the main reduction in foreign official holdings, notably central bank holdings, which fell from nearly 25% of the total to only 12%, and not private sector holdings, which remain relatively stable, as Chart 2 shows. Private foreign holdings of Treasuries have not increased to offset the decline in official holdings, perhaps because the inverted US yield curve and increased dollar fx hedging costs effectively removed the yield advantage in Treasuries since 2022.^[1]

Source: US Federal Reserve. Data to October 2024. Past performance is no guarantee of future results.

While other G7 governments also provided Covid fiscal support, the US’s policy decisions pre-Covid resulted in increased government debt levels prior to G7 peers. As a result, US federal debt has roughly doubled since 2016, and the US debt/GDP ratio now exceeds other G7 members, apart from Japan, as Chart 3 shows.

chart 3 shows As a result, US federal debt has roughly doubled since 2016, and the US debt/GDP ratio now exceeds other G7 members, apart from Japan. — Source: Datastream and US Federal Reserve. Data to end-2024. Past performance is no guarantee of future results.

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Perhaps unsurprisingly, this has also led to an increase in the US term premium, on 10 yr Treasuries, to the highest levels since 2011. Chart 4 shows that although the initial increase in the term premium after Covid was correlated with higher inflation rates, the increase has continued, despite the decline in inflation since 2022. Higher fiscal deficits, govt bond issuance and steadily rising US government debt/GDP ratios may explain the increased US term premium, as markets re-assessed fiscal policy plans, government debt issuance, and medium-term inflation risks.

Chart 4 shows that although the initial increase in the term premium after Covid was correlated with higher inflation rates, the increase has continued, despite the decline in inflation since 2022. — Source: US Federal Reserve, data to February 2025. Past performance is no guarantee of future results.

We also note that the US has a substantial WGBI weighting of nearly 43%, dwarfing other markets, as Table 1 shows.

WGBI constituents	US	European govt.bond index	All others	Japan	UK	WGBI
Weight in index %	42.8	26.2	16.1	10.1	4.7	100.0

Source: FTSE Russell, Feb.28, 2025 data. Past performance is no guarantee of future results.

But despite the high US weight in the WGBI, US sovereign spreads not narrowing since the Fed began easing rates in September 2024, the Fed’s slower than expected easing of interest rates, and the higher US term premium, the WGBI exc.US has still underperformed the WGBI, since 2020, as Chart 5 shows. This shows the underperformance occurs in both local currency and US dollar terms, so this is not a currency effect alone. Note that the most significant period of under-performance was during the period of rising rates and yields in 2022-23.

Chart 5 shows US has still underperformed the WGBI, since 2020. — Source: FTSE Russell, data to Feb 28, 2025. Past performance is no guarantee of future results.

Why is this? The best explanation for this may be duration^[2], since US Treasury market duration has fallen relative to other major WGBI constituencies since Covid, not only because of higher US yields but also the switch to even shorter US issuance. Chart 6 shows how the modified duration of the WGBI ex.US has increased relative to the WGBI over the last 20 yrs, and particularly after the GFC in 2008-09 and Covid in 2020, when the US Treasury issued a larger proportion of shorter US Treasuries.

Chart 7 shows that the US Treasury market has significantly shorter average duration in both conventional and inflation-linked bonds than other major markets. Indeed, none of the major markets have shorter duration than the US. This was an advantage during the period of Fed tightening and rising yields in 2022-23, given the lower sensitivity of prices to higher yields in the Treasury market than other major WGBI constituents. Now, however, as central banks have entered easing cycles, the shorter duration in US Treasuries may be less of an advantage, since if yields do fall, prices will increase less in the US than in Europe or the UK.

Extending the analysis to convexity, we find similar results. Remember that the convexity^[3] of a bond measures the change in its duration for a change in its yield. So, a bond with positive convexity will increase in duration as yields decline, giving the investor higher returns, and smaller losses when yields rise, since duration falls as yields increase. This makes higher positive convexity in bonds desirable for an investor, ceteris paribus. Chart 8 shows the convexity of the WGBI, and WGBI ex-US, since 2020, and the higher convexity in the WGBI ex-US.

Chart 8 shows the convexity of the WGBI, and WGBI ex-US, since 2020, and the higher convexity in the WGBI ex-US. — Source: FTSE Russell. Data to February 28, 2025. Past performance is no guarantee of future results.

Another factor here is that the US Federal Reserve may continue slower easing than other central banks, and hold rates higher for longer, particularly if US tax cuts are enacted and proposed tariff increases boost US aggregate demand and inflation. Although tariff increases may extend to Europe, weaker growth and inflation give the Eurozone more room to ease rates faster than the US.

But even if the Fed can ease policy faster than expected and exceeds the 50bp easing discounted for the rest of 2025, the extra duration and convexity in Eurozone and UK government bonds would allow them to at least match US Treasury gains.

1. See Foreign Institutional Investors, Monetary Policy, And Reaching For Yield BIS Working Papers No 1153, 11 December 2023

2. Duration measures a bond’s sensitivity to a rise in yield. This can be measured by using the weighted cash flows or Macaulay duration, or the modified duration which adjusts Macaulay duration for changing yields to maturity.

3. Mathematically, convexity is the 2nd derivative of the bond’s price with respect to a change in yield, where duration is the 1st derivative.

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