By Patti Domm
The bond market could have volatile moments early in the new year, but strategists expect yields to stay pretty much in the range they have been in during 2025 barring an economic shock or major geopolitical event.
The benchmark 10-year Treasury yield was at 4.16% Monday. The high yield in 2025 was 4.8% in January and a low of about 3.95% in October.
Pimco expects the 10-year yield in 2026 to stay in a range between 3.75% and 4.75%. The 10-year is important since it influences lending rates, including for home mortgages. It is also closely watched by stock investors.
"It is probably a tale of two halves, as is much of the economic outlook, " said Tony Crescenzi, Pimco executive vice president and portfolio manager. The labor market could look weak in the beginning of the year, "but then a bunch of things will begin to lift the economy upward."
For one, taxpayers may receive as much as $200 billion in additional refunds early in the year as a result of tax-law changes in the One Big Beautiful Bill enacted in July, he said.
The bond market had its nervous periods in 2025. Policy uncertainty was a major factor, but now there is a calmer mood as the market heads into January.
"The thing is that boring is beautiful to bonds...I'll take it," said Jim Caron, chief investment officer of the Portfolio Solutions Group at Morgan Stanley Investment Management.
The market had been concerned about the nomination of a new Federal Reserve chairman and whether that person would damage the Fed's independence.
President Donald Trump has criticized Fed Chair Jerome Powell for not lowering interest rates fast enough. He is expected to announce a replacement for Powell in January. Powell's term as chair ends in May.
The bond market could react poorly to any meddling with the Fed, but so far it hasn't shown sign of worry, said Crescenzi. "We wouldn't completely toss aside the issue, but the chances seem to be pretty high that the Fed's independence will be protected."
A bigger issue may be the Supreme Court case on Trump's efforts to fire Fed governor Lisa Cook. Trump attempted to fire her over mortgage-fraud allegations, which she denies. The Supreme Court hears arguments in the case Jan. 21.
At issue is whether the president needs cause to fire a Fed governor. If the ruling is a "blanket you-can-do-whatever-you-want,'" there would be a negative reaction in the market, said Caron.
A Supreme Court ruling on tariffs could also affect bonds. Strategists expect the court to rule against Trump's use of emergency powers to place tariffs on trading partners, though the administration says it can use alternative authorities to restore tariffs.
Trump's "Liberation Day" tariff announcement in April jolted financial markets. For a time, bond yields didn't exhibit the typical defensive posture they normally take when stocks sell off. Yields instead rose, meaning investors weren't buying bonds as a haven. The market has since calmed down.
The market is far less stressed about the impact of tariffs on inflation and the economy than it was in the spring. Tariffs have generated some inflation, but not the level some economists feared. The November Consumer Price Index inflation was less than expected at 2.7%, but some strategists expect inflation to persist around 3% in 2026.
The bond market also worried about high levels of U.S. debt in 2025, now near 100% of gross domestic product. While that fear hasn't gone away, it is being taken in stride for now.
"When you are in a rate cutting cycle and there is potential for yields to fall, it doesn't become much of an issue," said John Briggs, head of U.S. rates strategy at Natixis Corporate and Investment Banking. That may change toward the end of the year, he said.
Briggs expects the Fed to cut interest rates by a quarter point three more times before stopping. "In our view, the Fed will ease to April and then stabilize and then you have inflation being kind of sticky. If inflation is sticky, the potential for rate cuts is eliminated. The market then might start paying attention to what is the right level for long duration bonds," he said.
His view is that the 2026 low for 10-year yields would be at 4.15%, about current levels, but it should end the year closer to 4.6%.
Write to editors@barrons.com.
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2025 06:00 ET (11:00 GMT)
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