INVESTMENT VIEWS
FROM THE BNY INVESTMENT INSTITUTE
October 2025
At the September Federal Open Market Committee meeting, the Federal Reserve (Fed) reduced its benchmark interest rate by 25 basis points. We expect two additional rate cuts in 2025, absent any meaningful positive surprises in the labor market data.
Bonds in a shifting yield environment
When interest rates move, not all bonds respond the same way. Using current bond metrics such as yield to worst, duration and convexity, we illustrate how different types of bonds (ultrashort, short-term and intermediateterm) might perform if yields increase or decrease. The main takeaway from our analysis: intermediate-term bonds offer greater price appreciation potential as yields decline compared to shorter maturities.
The “belly” effect
The intermediate section of the yield curve, often called the “belly,” strikes an appropriate balance between Fed policy correlation, income generation and risk. As the Fed lowers rates, the front end is exposed to reinvestment risk, while extending too far out can increase volatility. In this environment, positioning in the intermediate range, particularly in 5-year and 7-year bonds, may provide investors with an opportunity to lock in current yields while capturing the potential for price appreciation.
This is an extract from Checkpoints, a comprehensive monthly chartbook that provides insights into major themes affecting financial markets. For additional analysis, read the full report.
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Drawing upon the breadth and expertise of BNY Investments, the Investment Institute generates thoughtful insights on macroeconomic trends, investable markets and portfolio construction.
Convexity is the measure of the curvature in the relationship between bond prices and interest rates.
Duration is a measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates.
Yield-to-worst is the lowest possible yield that can be received on a bond that fully operates within the terms of its contract, assuming the bond does not default entirely.
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Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
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