Portfolio perspectives
Expert Perspective
|December 12, 2025
Portfolio perspectives
Each month, you’ll have access to the latest insights from our Portfolio Solutions experts to help you address evolving issues that may affect your clients’ portfolios. In this edition:
- Recent and anticipated rate cuts by the Federal Reserve are shining a spotlight on portfolio risks associated with either end of the yield curve.
- Advisors should carefully evaluate reinvestment risk and price risk when managing client fixed income approaches, especially in a shifting interest rate environment.
Navigating reinvestment risk in a shifting rate environment
As the interest rate landscape continues to evolve, financial advisors face a nuanced challenge: managing reinvestment risk versus price risk within client portfolios.
Recent rate reductions by the Federal Reserve and expectations for further rate cuts have brought this dilemma to the forefront. In response, advisors are taking a closer look at how portfolio positioning along the yield curve can impact long-term outcomes.
The trade-offs of reinvestment risk versus price risk
Reinvestment risk—the possibility that portfolio cash flows will be reinvested at lower yields—is most acute for shorter-dated securities. While these securities have served clients well in recent years, Figure 1 demonstrates that starting yields for shorter-dated securities are less indicative of future returns over longer time periods. In contrast, longer-dated securities tend to exhibit greater price risk in the short term yet offer more return certainty over longer horizons.
Reinvestment risk increases for short-maturity securities as holding periods are extended
Range of returns relative to starting yields
Sources: Vanguard Investment Advisory Research Center Analysis using data from Federal Reserve Bank of St. Louis and Bloomberg as of August 31, 2025.
Notes: Analysis period: February 1981 through August 2025. 3-month U.S. Treasury: Bloomberg U.S. Treasury 3-Month Bellwethers. 2-year U.S. Treasury: Bloomberg U.S. Treasury 2-Year Bellwethers. 3-year U.S. Treasury: Market yield on U.S. Treasury securities at 3-year constant maturity, quoted on an investment basis, percent, monthly, not seasonally adjusted from February 28, 1981, through April 30, 2003; Bloomberg U.S. Treasury 3-Year Bellwethers, thereafter. 5-year U.S. Treasury: Bloomberg U.S. Treasury 5-Year Bellwethers. 10-year U.S. Treasury: Bloomberg U.S. Treasury 10-Year Bellwethers.
This dynamic gets at the crux of the dilemma and underscores the importance of aligning portfolio duration with client goals and investment horizons.
The yield curve in focus
While the bond crash of 2022 is still fresh in the minds of advisors, the result of higher interest rates has important implications for the risk-reward profile across the yield curve.
Figure 2 demonstrates how starting yields influence total returns given positive (or negative) interest rate movements for the 2-, 5-, and 10-year points along the yield curve. Relative to where starting yields were in 2022, today’s yields provide an important buffer against sudden increases in rates, while still benefiting from decreases in rates.
Current yields on Treasuries buffer the impact of rate increases and provide more ballast if rates drop
1% rate change effect on different Treasury maturities
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Sources: Vanguard Investment Advisory Research Center calculations using data from Morningstar Direct and Federal Reserve Bank of St. Louis FRED database.
Notes: Modified duration calculated using 2-year constant maturity yields as of December 31, 2021, and October 31, 2025. Changes in rates are assumed to impact the price of bonds immediately and it is assumed that the change in rates is the same across the entire yield curve.
Potential solutions to consider
You can look into intermediate-duration bonds to mitigate against the reinvestment risk vulnerability of shorter-dated securities and the price risk that can be characteristic of longer-dated securities.
Vanguard Core Bond ETF (VCRB) and Vanguard Core-Plus Bond ETF (VPLS) seek to provide total return while generating a moderate level of current income.
Our Total Bond Market Index Fund ETF (BND) seeks to track the performance of a broad, market-weighted bond index, while our Intermediate-Term Bond Index Fund ETF (BIV) seeks to track the performance of a market-weighted bond index with specific emphasis on an intermediate-term, dollar-weighted average maturity.
Need to adapt your client portfolios’ fixed income approaches to account for an interest rate environment in motion? We recognize that every client’s circumstances will be different and appreciate the need for nuance in building portfolios. To that end, our specialists can help you evaluate relative exposure to the risks discussed in this article, so you can make informed decisions about your clients’ fixed income duration and yield-curve positioning. Reach out to your Vanguard representative for more information.
Partner with Vanguard Portfolio Solutions
Reinvestment risk and price risk can be material considerations that affect your clients’ long-term portfolio outcomes. Our team can help you manage those risks by pressure-testing strategies and gleaning insights about potential performance before you implement.
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1 Yield-to-maturity (YTM).
More Vanguard analysis
For additional expert insights, check out:
- Advisor Trends: Find out how your portfolios stack up in comparison with your advisor peers.
- Market perspectives: Turn to Vanguard's senior economists each month for projected returns and monthly economic highlights on inflation, growth, and expected Fed actions.
- Active Fixed Income Perspectives: View our quarterly, in-depth commentary for a sector-by-sector analysis and a summary of how those views affect the Vanguard active bond funds.
- ETF Industry Perspectives: Get the latest ETF trends and insights from our investment experts to help you address issues that may affect your clients' portfolios.
Notes:
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- Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
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