Interest rates are back to levels that many advisors and their clients have never experienced in their investing lives. For some, the shift feels jarring after more than a decade of near-zero policy rates. For others, the environment represents a chance to rethink fixed income strategies, taking advantage of yield opportunities while protecting portfolios from duration risk.
In an interview with The Wealth Advisor’s Scott Martin, Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, offers a fresh perspective on today’s bond market. Rather than seeing current yields as abnormal or distressed, Flanagan frames them as a return to historical norms—a crucial mindset shift for advisors guiding clients through fixed income allocations. WisdomTree’s tactical solution centers on a barbell approach, combining its Floating Rate Treasury Fund (ticker: USFR) and Yield Enhanced U.S. Aggregate Bond Fund (ticker: AGGY) to create a strategic framework that aims to manage duration risk while capturing income opportunities.
USFR is designed to provide cost-effective access to newly issued U.S. government floating-rate notes, which are priced at a spread over three-month Treasury bills and fluctuate with short-term rates. The short-term government bond solution seeks to offer yield opportunities while limiting duration risk.
The goal of AGGY is to serve as a core fixed income allocation with a rules-based methodology that reweights components of the Bloomberg U.S. Aggregate Bond Index, or the Agg, aiming to enhance income potential, all while broadly maintaining familiar risk characteristics.
Together, USFR and AGGY seek to offer a flexible framework that allows advisors to tactically manage duration while aiming to capture yield and diversified exposure across the fixed income spectrum.
A Return to Historical Norms
Flanagan stresses that today’s yields reflect a fundamental recalibration, not market turmoil. “A lot of investors and advisors out there who came into the market after the financial crisis, they’re not used to seeing 4% Treasuries, 5% corporates, 7% or 8% high yield,” he notes. Participants who learned the market during zero interest rates and quantitative easing experienced an aberrant period, not the long-term norm.
Treasury yields have returned to levels similar to the 1988–2007 period. While not fully aligned with that historical range, Flanagan says, rates sit far above the 2010–COVID 19 era, putting fixed income back into the spotlight as a meaningful asset class rather than an afterthought.
A New Generation of Market Participants
Advisors face more than allocation challenges. Since a large segment of today’s investors has never experienced interest rates at historically normal levels, education is essential. “A whole generation of market participants who’ve never seen this before,” Flanagan points out, “requires advisors to present current conditions as normal rather than distressed.”
Even with the Federal Reserve continuing its rate-cutting cycle, he expects yields to remain well above 2010–2021 levels. Normalization isn’t just about absolute yields; it also restores positive yield curves and more rational credit spreads. Although credit spreads remain compressed, Flanagan prefers a neutral stance on credit exposure, waiting for spreads to widen before taking a more aggressive approach.
The yield curve’s shape can offer opportunity, especially at the ultra-short end. Treasury floating rate notes (FRNs) can be compelling relative to fixed-coupon alternatives across most of the curve, with only 20- and 30-year bonds maintaining a standard upward slope as of September 2025.
Capitalizing on Curve Dynamics with USFR
WisdomTree’s Floating Rate Treasury Fund has been around since 2014, coinciding with the introduction of Treasury floating rate notes. Many investors remain unfamiliar with this asset class within the Treasury suite. USFR resets with the weekly three-month Treasury bill auction, providing transparency tied to short-term rates, while also including an additional spread.
“It’s their LIBOR; it’s their SOFR,” Flanagan says, helping investors understand both the reference rate the FRNs are pegged to and the yield potential from the spread component. The spread is a function of the fund’s holding primarily two-year maturities. “These spreads build, I think, a little cushion above what you would normally see for Treasury bills,” he adds. “And it’s helping us, in this environment, continue to garner yield ahead of most of the fixed coupon Treasury curve.”
Floating rate structures may also protect investors as Federal Reserve policy evolves. “If the Fed cuts rates one or two more times, yield levels are still at the point where they’re 50 or 60 basis points above a two- to three-year maturity, so you’re way ahead of the game at this stage,” Flanagan notes. “So, there’s no rush or no urgency at this stage to have a major reallocation in fixed income if you’re using, or you’re considering using, Treasury floating rate notes.”
That spread feature distinguishes floating rate notes from standard Treasury bills, aiming to offer enhanced yield without adding duration risk. “That’s the important part of the concept here that you don’t see if you’re buying a regular T-bill,” he emphasizes. “That distinction provides that yield advantage at this stage of the game.”
Building Core Exposure with Enhanced Methodology
Beyond ultra-short positioning, many advisors need core exposure that addresses structural weaknesses in traditional aggregate bond indices. The Bloomberg U.S. Aggregate Bond Index is heavily concentrated in government debt, and with the federal deficit running at $1.9 trillion through August, Treasury supply has skewed traditional indices heavily toward government exposure, Flanagan points out.
WisdomTree’s Yield Enhanced U.S. Aggregate Bond Fund aims to tackle concentration concerns through rules-based reweighting. Rather than following a market-cap weighting that puts more than 40% of traditional aggregate indices in Treasuries, AGGY adjusts sector weights. “What our strategies do is, within a certain rules-based approach, reweight those sectors,” he notes.
The approach aims to preserve familiar risk characteristics while boosting yield potential. “You’re not adding EM. You’re not adding leverage or anything like that,” Flanagan emphasizes. “You’re just reweighting the components, somewhat similar duration, and you’re picking up some additional yield in the process.” The result seeks to offer core fixed income exposure without the concentration risk typical of traditional indices.
Implementing the Barbell Strategy
The combination of USFR and AGGY forms what Flanagan calls a barbell approach. Rather than choosing between ultra-short duration and core exposure, advisors can blend both to meet client risk profiles and income objectives.
The barbell provides tactical flexibility essential in uncertain rate environments. “You do have some flexibility that you can toggle on this barbell—the weighting, say, between our in-house USFR and AGGY—to try to fit whatever risk parameters, needs, wants you may have as an end investor,” Flanagan explains.
Duration management is key as the Fed continues its quantitative easing and all but the longest-term yield curves are flat or inverted. Looking over the rate-cutting cycle since September 2024, he observes that “the 10-year Treasury yield doesn’t necessarily move in the direction of Fed funds. It can have a mind of its own. So, you’ve seen the 10-year Treasury yield rise during some of these episodes.”
With longer-duration positions challenged, the barbell aims to mitigate duration risk while maintaining income potential. “You’re not being rewarded for taking on that extra interest rate risk, or duration risk,” Flanagan says. “So that’s why, to me, pairing core, which is, say, roughly six, six and a half years in duration with something like a Treasury floating rate note, affords you the opportunity to try to grab yield, try to lock in some income, but also mitigate, even if the Fed cuts rates further, that you could still see a 10-year yield go up.”
Managing Inflation and Recession Scenarios
Today’s economic backdrop poses unique challenges. According to Flanagan, with unemployment hovering above 4% and core Consumer Price Index (CPI) inflation at 3.1% year-over-year, recession risks are limited but inflation remains a concern. He questions the conventional approach of extending duration, noting, “If you’re not going into a recession, yields could actually rise.”
Floating rate instruments may provide natural inflation protection. “What if inflation is something that doesn’t behave and does move higher? I think that’s something you want to protect against,” cautions Flanagan.
Duration positioning can also create tricky client conversations, especially during Fed easing. “That is what I think you don’t want to have happen in your bond portfolio, especially in an environment where the Fed’s cutting rates, where all of a sudden the client would say, ‘Well, wait a minute, If the Fed’s cutting rates, how can I be losing money?’ That’s what can happen, perhaps, if you go too long duration,” he says.
Simplifying Portfolio Construction
The barbell approach also might be helpful with portfolio management when over-diversification leads to unwieldy bond lineups. “Advisors are trying to reduce line items in their portfolios,” Flanagan notes. Meanwhile, the barbell may offer elegant simplicity: “You don’t want to have your bond portfolio with 10 or 15 line items, per se, and if you can achieve that diversified approach with just two tickers, I think it makes a lot of sense.”
The goal is to balance income generation with capital preservation objectives through strategic duration positioning. Rather than choosing between competing objectives, the barbell allows advisors to pursue both simultaneously. “Yield-like numbers that you see in the Agg, but really mitigate or reduce that duration? That’s what this barbell does,” Flanagan says.
Assessing Risk in Normalized Markets
Risk assessment requires recalibration in normalized rate environments. While high-yield spreads trade at historically narrow levels, Flanagan maintains perspective on context. Current spreads, while tight, represent “periods where we can reside at these levels,” though he acknowledges that “your cushion, your margin for error, has been reduced.”
Rather than avoiding risk entirely, he advocates patience and timing. “Are we in an area that has not been seen, or something that hasn’t occurred before? No,” Flanagan says. “So, to me, a correction or some consolidation in risk, such as high yield, would probably be viewed as a welcome development.”
Guiding cash-heavy clients toward meaningful investment decisions is key, especially against a backdrop of rate normalization where opportunities for income and yield return. “If you have been sitting in cash and you’re looking to deploy some of your money, I think these are the conversations you should be having with your advisor.”
Ultimately, the return to normalized interest rates presents potential opportunities for advisors ready to embrace structural shifts in fixed income without sacrificing disciplined risk management. Using tools such as USFR and AGGY, advisors can implement a barbell strategy that aims to balance yield generation with duration management, seeking to help clients navigate evolving market conditions with both flexibility and confidence.
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Additional Resources
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Glossary
Basis Points: 1/100th of 1 percent.
Bloomberg U.S. Aggregate Bond Index (Agg): Represents the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, as well as mortgage and asset backed securities.
CPI: A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance.
Credit Spread: The portion of a bond’s yield that compensates investors for taking credit risk.
EM: Emerging Markets.
LIBOR (London Interbank Offered Rate): LIBOR was a benchmark interest rate at which major global banks lent to one another in the international interbank market for short-term loans. It served as a globally accepted key benchmark interest rate until it was phased out due to concerns about its reliability and susceptibility to manipulation.
SOFR (Secured Overnight Financing Rate): SOFR is the alternative benchmark to LIBOR. It is based on transactions in the U.S. Treasury repurchase (repo) market, where investors offer banks overnight loans backed by their bond assets. SOFR is administered by the Federal Reserve Bank of New York and is considered more robust, transparent, and less susceptible to manipulation than LIBOR.
Yield Spread: The amount of incremental income a bondholder receives for assuming credit risk.
Important Information
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. For a prospectus or, if available, the summary prospectus containing this and other important information about the fund, call 866.909.9473 or visit WisdomTree.com/Investments. Read the prospectus or, if available, the summary prospectus carefully before investing.
There are risks associated with investing, including possible loss of principal. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.
WisdomTree Floating Rate Treasury Fund (USFR) risk information: Securities with floating rates can be less sensitive to interest rate changes than securities with fixed interest rates, but may decline in value. Fixed income securities will normally decline in value as interest rates rise. The value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs.
WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY) risk information: Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond 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. Investing in mortgage- and asset-backed securities involves interest rate, credit, valuation, extension and liquidity risks and the risk that payments on the underlying assets are delayed, prepaid, subordinated or defaulted on. Due to the investment strategy of the Fund, it may make higher capital gain distributions than other ETFs.
WisdomTree Funds are distributed by Foreside Fund Services, LLC.
