Investors are gradually extending duration within the front end of the Treasury curve, shifting from ultra-short, cash-like exposures toward targeted-duration strategies in search of higher yields. A recent disclosure showed Senator John Boozman purchased the BondBloxx Bloomberg Two Year Target Duration US Treasury ETF (NYSE:XTWO) in February, while trimming exposure to the iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY), reflecting a broader trend rather than a defining signal.
“Investors are buying short duration U.S. Treasury ETFs because they provide safety, liquidity, attractive yields, and low-interest rate volatility. They are a reliable ‘parking place for cash’ during time periods where market volatility is elevated,” said JoAnne Bianco, Partner at BondBloxx.
Yield Hunt Drives Move Along The Curve
With expectations for Federal Reserve rate cuts fading, and, as a matter of fact, chances of a rate hike back on the cards, investors are increasingly looking slightly further out on the curve to enhance income.
“Yes, we are seeing increasing client demand for our targeted duration strategies further out in duration from ultra-short strategies. With less likelihood of rate cuts by the Federal Reserve, investors are attracted to the higher yields further out on the curve,” Bianco told Benzinga.
“Our clients are telling us they like the higher yield offered by XTWO versus shorter duration US Treasury exposure while maintaining relatively low interest rate risk,” she added.
Intermediate Duration Finds Favor
The evolving macro backdrop is reinforcing this positioning shift.
“The geopolitical conflict and oil price shock have rekindled inflation risks and reduced Fed easing expectations. This environment makes intermediate U.S. Treasury duration attractive in our view. Longer maturities face greater pressure from rising term premiums and fiscal spending concerns, while shorter maturities sidestep those risks but sacrifice income,” Bianco said.
Flows are reflecting this dual demand. “Flows have accelerated into short-duration Treasury ETFs as investors turn to them as a safe haven in the current more volatile market environment. Investors have also been repositioning into intermediate Treasury ETFs as a defensible, balanced solution: a yield pick-up over shorter Treasuries, less interest rate risk than longer Treasuries,” she noted.
Precision Tools For Volatile Markets
Targeted-duration ETFs like XTWO are also gaining traction as more precise tools for rate positioning. Unlike traditional maturity-based bond funds, these strategies maintain stable duration exposure, helping investors avoid “duration drift” during volatile rate cycles.
Bianco said advisors and institutional investors are using such funds for multiple purposes — from cash alternatives to defensive allocations and tactical duration trades tied to Fed policy expectations.
“The benefit of XTWO is that advisors can use this fund for any of these strategies – as a higher yielding cash alternative, an extension trade from ultra-short duration, and a defensive allocation versus other fixed income or equity investments,” she said.
If rate cuts materialize later this year, funds like XTWO could benefit more than shorter-duration peers due to their slightly longer duration profile.
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