The U.S. Treasury market closed out 2025 with a little last‑minute drama: the benchmark 10‑year yield ticked higher on the final trading day after an unexpectedly low reading on weekly jobless claims, even as the full year wraps up with yields materially lower than where they started.
On Wednesday the 10‑year pull‑up was modest — roughly a single basis point, leaving the yield near the 4.13%–4.15% area — but the move encapsulated the tug of war that defined the bond market all year. Traders have spent 2025 reacting to a mix of Federal Reserve policy pivots, sticky-but‑easing inflation, and episodic shocks to market expectations.
A last‑minute bump from payrolls and the holiday noise
Initial jobless claims for the week ending Dec. 27 came in at about 199,000, well below economists’ forecasts of roughly 220,000. That surprise underscored that, despite slower hiring in some corners, the labor market is far from collapsing — and the bond market responded by nudging yields higher.
“Claims are volatile around the holidays, but the lack of any material weakness is striking,” said Christopher Rupkey of FWDBONDS, reflecting a common interpretation that stronger‑than‑expected labor data can lift rate expectations and push yields up.
It’s worth noting the context: the economy has been stubbornly resilient even as the Fed moved from a hawkish stance earlier in the year to three official rate cuts in the second half of 2025. Those cuts are the main reason yields finish the year below their January peaks.
How we got here — from tariff shocks to Fed minutes
Volatility this year often had a political beat: an April spate of “reciprocal” tariff announcements from the White House briefly sent yields lower and then higher as investors parsed the inflationary and growth implications. The 10‑year hit a high of roughly 4.80% in mid‑January before settling into a lower range as market participants increasingly priced Fed easing.
The Federal Reserve’s own communications added to the swings. Minutes from the Fed’s Dec. 9–10 meeting showed a divided stance among policymakers even as they voted to cut rates again, which fed speculation about timing and magnitude of future cuts. After the minutes, traders nudged up bets that another cut could arrive as early as April.
Curve, inflation expectations and the plumbing of markets
The two‑year yield — more sensitive to near‑term Fed expectations — also ended the year well below where it began, marking one of the largest annual drops since 2020. The two‑to‑10‑year spread (the so‑called 2s10s) sits in the neighborhood of roughly 65–75 basis points, a level that signals a positively sloped curve but one that’s narrowed from earlier in the year.
Market gauges of inflation expectations have been drifting toward the Fed’s target; five‑year forward inflation swaps and TIPS‑based measures point to a moderate decline in expected inflation over the next several years, even if they remain a touch above 2% in some readings.
Meanwhile, the plumbing of short‑term markets made headlines right before year‑end: eligible firms borrowed a record amount — tens of billions of dollars — from the Federal Reserve Bank of New York’s standing repo facility as they squared positions heading into the holidays. That kind of activity matters because it affects demand for Treasuries and other high‑quality collateral.
What investors are thinking about 2026
With the Fed having loosened policy three times in 2025, the market now looks forward to whether cuts continue next year. Some models and traders expect further easing, but odds of an immediate January cut remain relatively low. Economists such as Jeffrey Roach of LPL Financial argue that inflation is likely to gravitate closer to the Fed’s 2% target, which could allow for a couple of rate cuts in 2026 as labor markets cool.
For bond investors the lesson of 2025 is simple enough: policy expectations and surprise data still drive big day‑to‑day moves, but a tilted path of Fed easing can drag yields lower over the course of a year. The last trading day’s small uptick is a reminder that a resilient jobs market can interrupt that trend — and that next year’s story will be written one data point at a time.