Paid to wait: The case for slowly adding duration to your bond portfolio

Data as of 16 October 2026.
Source: Bloomberg, iFAST Compilations.

The cushion builds with time. If yields jumped 100bps straight after purchase, a 10-year bond would show a paper loss of about 7%. Holding it for about 15 months would still break even, provided yields rise no further.

Pricing the benchmark bonds shows how that payoff changes along the curve (see Chart 2 below).

Chart 2: Why stop at 10-year bonds, instead of 20-30-year bonds 

Data as of 16 October 2026.
Source: Bloomberg, iFAST Compilations.

Bonds are diversifying again. On 15 October, a global equity sell-off driven by worries over AI spending pushed the US 10-year yield down almost 13bps. Treasuries rallied while stocks fell, a pattern that was largely missing in 2022–23. Real yields add to the case. The 10-year yield is about 1.4 percentage points more than US CPI inflation (3.7% in September) and 1.9 points more than UK CPI (3.5% in September). In Singapore, the margin over MAS core inflation (2.1% in July–August) is only about 0.2 points.

But the macro backdrop is not on our side yet

An attractive starting point does not mean going all in. Inflation is moving the wrong way in all three markets, and central banks are leaning towards tighter policy. That is the main reason we are not calling for a large, one-off move into long bonds.

Table 1: Inflation remains hot, rate hikes are still live 

In the US, September's surprise was not only about petrol: core prices also firmed. After the 14 October CPI release, futures-implied odds of a Fed hike on 28 October roughly doubled, to about 40–50%. A December move is widely expected. In the UK, the Bank of England expects inflation to reach about 3.75% this quarter and slightly above 4% in early 2027. Markets price in more than 100 basis points (bps) of further UK tightening by late 2027; 100bps equals one percentage point.

The common driver is energy: Brent crude reached USD106 a barrel on 14 September, according to the Bank of England. Until inflation turns and policy rates peak, yields could continue to climb. This is why we suggest buying in stages rather than all at once.

Use a barbell, not a bullet

We recommend adding duration through a barbell rather than a bullet. A bullet concentrates holdings around one maturity, such as five years. A barbell splits them between two ends: short-term government bills (T-bills) and bonds maturing within two years at one end, and 7–10 year government bonds at the other. The 3–6-year middle is largely skipped. Five reasons make this structure suit today's market.

1. The short end pays you to wait. Short bonds earn almost as much as long ones. The curve is unusually flat. A 2-year Treasury yields 4.71% against 5.08% on the 10-year; in the UK it is 4.74% against 5.37%. Even if yields rise 100bps, a 2-year Treasury or Gilt still returns about 3.7–3.8% over a year.

2. Short-term bonds benefit if rates keep rising. If the Fed and Bank of England hike further, short-term bonds mature soon and can be reinvested at higher yields. The extra income helps offset price losses on the longer-term bonds.

3. The short end is dry powder. As short-dated bonds mature, the proceeds can be used to buy the next tranche of 7–10 year bonds. This lengthens the portfolio’s duration in stages without needing new cash.

4. The middle offers neither advantage. A 5-year bond matures too late to be recycled quickly at higher yields, yet locks in less income than the 10-year: 4.87% against 5.08% for Treasuries. It is also closely tied to where markets expect policy rates over the next few years, and those expectations are still shifting.

5. The flexibility costs little. We compared a 2-year/10-year Treasury barbell with a 5-year note of the same duration, using Bloomberg pricing. When yields across the curve moved by the same amount, anywhere from down 100bps to up 100bps, the two returned within 0.1 percentage point of each other over a year. The same held for Gilts. The test does not cover the curve changing shape, which is the main risk below.

The main risk to the structure is a sharp steepening, where long yields rise while short yields fall. A fiscal scare could do this, which is one more reason to cap the long end at 10 years.

While we use government bonds to express how you could build a barbell that extends duration, the same approach works with bonds from high-quality corporate issuers. That said, do be mindful of corporate spread risk. With corporate spreads at historically tight levels, however, investors earn little extra yield over government bonds for taking on credit risk. If markets turn risk-off, that gap could widen, hurting corporate bond prices even as government bonds rally.

Why gradually, and why 7-10 years

Gradually, because the peak may still be ahead. With hikes still possible in the US and UK, yields could continue to climb before they peak. Spreading purchases over three or four quarters averages the entry level. Each quarter held also adds roughly 15–20bps of cushion to the tranches already bought.

Ten years, because the extra yield beyond it is thin. Moving from the 10-year to the 20-year adds about 40bps of yield in the US and 44bps in the UK. But duration rises from about 7.7 to over 12, and the one-year loss from a 100bps rise triples or more, to about 5.5% (Chart 2 above). Fiscal and supply risks also sit at the long end, which is where a steepening would hurt most.

Seven years, for more roll-down per unit of risk. On an upward-sloping curve, a bond gains in price as it ages, because shorter bonds trade at lower yields. The US curve is slightly steeper between five and seven years (9bps over two years) than between seven and ten (11bps over three).

A 7-year Treasury held until it becomes a 5-year bond would earn about 5.2% a year from income and roll-down if the curve stays put. A 10-year earns about 5.3%, but with a third more duration. Including roll-down, the 7-year can absorb a rise of about 105bps in yields over 12 months, against about 77bps for the 10-year. Investors holding bonds directly can buy at seven years, sell at around five, and reinvest in the 7–10-year bucket.

Putting it into practice

We recommend moving 5–10% of the fixed-income allocation into 7–10-year government bonds over three to four quarters, funded from the short leg. The illustration below assumes 20% of the allocation starts in short-dated holdings; the other 80% is left unchanged. Plan to hold each long-leg tranche for at least 18 months, long enough for its income to absorb a 100bp rise in yields.

Know what would change the pace. Speed up if the Fed and Bank of England signal a peak, core inflation falls for two to three months, or oil eases. Slow down if inflation expectations climb, or if a fiscal shock, such as a poorly received UK Budget, pushes long yields sharply higher.

Table 2: Slowly building into duration

Where to build the long leg. Lean towards Treasuries and Gilts, where the cushion is thickest. We leave out Singapore Government Securities (SGS): at about 2.3%, a 10-year SGS needs almost three years of income to absorb a 100bp rise.

For investors looking to add duration through ETF/funds, we recommend the following in Table 3 below. 

IDTM for the long leg. The iShares USD Treasury Bond 7-10yr UCITS ETF (LSE: IDTM) is a low-cost way to hold 7–10-year Treasuries: its expense ratio is 0.07%, its yield to maturity is about 5.1%, and it pays twice a year. Its index drops bonds once they fall below seven years, so it captures roll-down between 10 and 7 years automatically. Investors who want the 7-to-5-year roll-down need to hold bonds directly. IDTM is unhedged USD; as an Irish-domiciled UCITS ETF, it avoids the US estate-tax issue that comes with US-listed funds.

PIMCO Income Fund is for investors who prefer to delegate. Alongside its USD base share class, it offers SGD and GBP hedged classes. The managers adjust duration within their 0–8-year range. Much of its yield comes from credit and mortgages, which carry different risks from government bonds. We see it as a complement to the barbell, not a replacement for its long leg.

Table 3: Product recommendation

The bottom line

Treasury and Gilt yields are the most generous since before the GFC, giving investors room to be early. The macro picture still argues against rushing. A barbell lets investors lock in long-term yields now, keep earning on the short end, and hold cash in reserve if yields climb further. We think this patient approach beats trying to call the exact peak in yields.

Disclosure: This research report was prepared with assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity. For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the above-mentioned securities.