Investors are piling into big, short Treasury bets alongside Warren Buffett

Investors are favoring short-term fixed income, as evidenced by significant ETF inflows into ultra-short Treasury bond ETFs like SGOV and BIL, which have taken in over $25 billion this year. This preference is driven by concerns about volatility and negative performance in longer-duration bonds, with Strategas Securities advising clients to avoid bonds with durations longer than seven years. Experts suggest investors diversify portfolios with fixed income and consider international equities, as European and Japanese equities are currently outperforming U.S. large-cap growth.

Analysis

Current fixed-income market dynamics indicate a strong investor preference for shorter maturities, driven by significant volatility and negative performance in longer-duration bonds. ETF flows in 2025 underscore this trend, with ultra-short Treasury bond ETFs such as iShares 0-3 Month Treasury Bond ETF (SGOV) and SPDR Bloomberg 1-3 T-Bill ETF (BIL) attracting over $25 billion in assets, positioning SGOV as the second-highest recipient of new investor money this year, surpassed only by Vanguard's S&P 500 ETF (VOO). Vanguard's Short Term Bond ETF (BSV) also ranks within the top 20, with over $4 billion in flows. This shift is supported by current yields, with the 3-month T-Bill offering over 4.3% and the 2-year T-Bill at 3.9%, compared to the 10-year Treasury at approximately 4.4%, which carries higher volatility. Joanna Gallegos of BondBloxx notes less volatility and more stable yields in the short and middle segments of the curve, while Todd Sohn of Strategas Securities advises against durations exceeding seven years, highlighting that the 20-year Treasury has fluctuated between negative and positive returns five times this year. Reinforcing this cautious stance, Berkshire Hathaway has reportedly doubled its T-bill ownership, now holding 5% of all short-term Treasuries. The bond market's apprehension stems from the Federal Reserve's paused rate-cutting campaign amid inflation concerns, exacerbated by potential tariffs, alongside broader worries about government spending, deficit levels, and an impending tax cut bill. Sohn notes that long-term treasuries and corporate bonds have exhibited rare negative performance since September, a phenomenon otherwise seen only during the Financial Crisis. Amid this bond market turbulence and high equity market volatility—the S&P 500 experienced a record high, a 20% drop, and a subsequent recovery this year—there's a concern that investors may be under-allocated to fixed income. Concurrently, opportunities in international equities are emerging, with European equities (e.g., EZU up 25% YTD) and Japanese equities (e.g., EWJ up 25% over two years) showing strong performance, suggesting diversification benefits beyond U.S. large-cap growth.

Key Decisions for Investors

• Investors should consider maintaining or increasing allocations to short-duration fixed income instruments, such as Treasury bills and short-term bond ETFs (e.g., SGOV, BIL, BSV), to capitalize on attractive yields (3-month T-Bill >4.3%, 2-year at 3.9%) and mitigate volatility prevalent in longer-dated bonds.
• Exercise caution with long-duration fixed income (beyond seven years) due to heightened volatility and recent negative performance, closely monitoring inflation trends, Federal Reserve policy signals, and fiscal developments which are key drivers of long-end yield movements.
• Re-evaluate portfolio diversification, ensuring fixed income plays an adequate role, and explore opportunities in international equities, particularly in European (EZU) and Japanese (EWJ) markets, which have demonstrated strong recent performance and can offer diversification from concentrated U.S. large-cap growth exposures.