Recency and Risk

When consensus was for the US Federal Reserve to cut interest rates multiple times in 2025, many advisors were telling clients to sell short-term bonds and buy longer-term maturity bonds. It hasn’t happened, and investors seem to have stayed in short-term bonds. Two things may explain this 1) Recency Bias and 2) Risk Aversion. First, US short-term interest rates may be low at about 4.3%, but coming out of the Global Financial Crisis interest rates were about 0%. The ten-year US government bond was 1.6% ten years ago. It is now 4.6%. When today’s yields are compared to these, they don’t look so bad. Second, bonds involve more risks than people think. As short-term bonds are normally less risky than long-term bonds, when risk is on the rise, short-term bonds normally outperform long-maturity bonds. Bond market risks include: the US Federal Reserve not cutting rates multiple times in 2025, US inflation staying high, and US government borrowings rising excessively. In all these scenarios, short-term bonds should do better than longer-term bonds. The good new is that you can find variety in short-term bonds. If you don’t like US yields you can buy Mexican or Brazilian. When an investors buys Mexican or Brazilian bonds they get higher yields and the benefit of being short-term This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit etherfuse.substack.com