Add Duration to Fixed Income as Tariff Policy Develops

I'm increasingly comfortable with fixed income and specifically like the 30-year end of the treasury curve.

That does translate well into owning:

Longer-dated treasuries (10 years and longer). TLT is on the aggressive end (20 to 30 years) but I like it.

Investment grade corporate bonds will do well too if I’m correct LQD.

I also would add to my old “stand by” closed-end municipal funds.

I want more duration risk (longer dated bonds) than five years (so I can move some money market funds out the curve). I want duration more than credit risk, so prefer long-dated IG versus high yield (it doesn’t have as much interest rate sensitivity)

Why?

At this point, the deficit from the budget is quite priced in. This is when people realize that, as big as the number is, it does drift in over time.

While I’m not fan of tariff policy, it is generating income for the Treasury and will offset some of the deficit (and that is not being factored in).

I expect some economic weakness to leak into the data. Tariff inflation, at these levels of tariffs, will take time to show up as inflation and will be minor. My assumption is that for 10%, the exporter will absorb some. The importer will absorb some, but what they plan on passing on will take time to pass on, as many prices are contractual and cannot be moved immediately.

I highlighted on Friday that, while the headline job number was “strong,” the details were far from strong, and more and more people question the validity of the birth/death model as the approach to getting an Employment Identification Number has changed with the gig economy in ways the BLS has not figured out.

We have 10- and 30-year treasury auctions on Wednesday and Thursday. There is some concerns about the auctions.

Traditionally, dealers try and push yields higher into the auctions, and bonds do well after the supply is over.

Corporate supply, which indirectly affects treasury yields, should also be slowing as we enter the summer.

Finally, and this is just a guess, but I bet Howard Lutnick and Scott Bessent are working the phones to get a good auction. I have had big disagreements with Lutnick on trade (for anyone reading these notes) but he did run Cantor and Cantor was a primary dealer. He knows bond auctions. They both know the market is looking at the auctions to get a sense of where yields are heading – I’d be surprised if they aren’t spending some time on these “premier” auctions – the 10s and 30s are the “majors” and that’s what I would be doing if I was in their shoes.

So, add duration to the fixed income portion of your portfolio (extend the maturities of holdings where you can).