Bond Market Update

Strong Year Capped With Modest Dip

• U.S. Treasuries finished 2025 on a modestly lower note with the 10-yr yield settling near the midpoint of this year's range while the 2-yr yield finished not far above its 2025 low as the Fed made three cuts to the fed funds rate range since the end of 2024. Today's session was largely uneventful, save for a couple waves of selling that lifted yields to their highest levels of the week. The trading day started with slim gains across the curve, but the entire complex slid after the latest weekly jobless claims report showed only the second sub-200,000 reading of initial claims (199,000) this year. The positive signal about the health of the labor market sent Treasuries to lows during the opening hour while the rest of the morning saw a slow bounce that found resistance once the complex approached yesterday's closing levels. There was some more selling during the final hour of action, but even with late slide that was presumably owed to year-end rebalancing, the 10-yr yield was confined to a four-basis point range. The benchmark yield finished 2025 about 20-basis points shy of the midpoint of this year's 92-basis point range while the 2-yr yield finished just nine basis points above its October low, and down 95 basis points from its January peak. The long bond underperformed with its yield finishing ten basis points above the midpoint of this year's 81-basis point range, bearing some resemblance to what has been seen in Japan as the Bank of Japan tightens policy after nearly three decades of zero interest rate policy. With JGB rates reaching 30-year highs, investors in the saver nation have had a growing incentive to repatriate some of their foreign investments that can now earn a return at home without currency risk. This dynamic should continue next year with the market expecting at least one more hike from the BoJ in 2026. Crude oil retreated, losing nearly $15/bbl for the year, while the U.S. Dollar Index rose 0.2% to 98.38, narrowing its December loss to 1.1%. The Index fell 9.3% in 2025. Bond and equity markets will be closed for New Year's Day tomorrow, followed by a full session on Friday. Happy New Year!
• Yield Check:
  • 2-yr: +3 bps to 3.48% (-1 bp in December; -77 bps in 2025)
  • 3-yr: +3 bps to 3.54% (+5 bps in December; -74 bps in 2025)
  • 5-yr: +4 bps to 3.73% (+13 bps in December; -65 bps in 2025)
  • 10-yr: +4 bps to 4.17% (+15 bps in December; -40 bps in 2025)
  • 30-yr: +3 bps to 4.84% (+17 bps in December; +5 bps in 2025)

• News:
  • The Chinese government plans to continue issuing trade-in subsidies for auto purchases in 2026 and will expand the program to include digital and smart products.
  • China Securities Journal reported that domestic banks will slash business loan rates below 3.0%.
  • China's December Manufacturing PMI hit 50.1 (expected 49.2; last 49.2) and Non-Manufacturing PMI hit 50.2 (expected 49.6; last 49.5). December RatingDog Manufacturing PMI hit 50.1 (expected 49.8; last 49.9).
  • South Korea's December CPI was up 0.3% m/m (expected 0.2%; last -0.2%), rising 2.3% yr/yr, as expected (last 2.4%).
  • Hong Kong's November M3 Money Supply increased 4.5% yr/yr (last 3.5%).
  • Singapore's November Bank Lending reached SGD873.1 bln (last SGD866.1 bln).
  • Swiss November Official Reserve Assets reached CHF852.4 bln (last CHF844.9 bln).
• Today's Data:
  • Initial jobless claims for the week ending December 27 decreased by 16,000 to 199,000 (Briefing.com consensus 226,000) from last week's revised rate of 215,000 (from 214,000), while continuing claims for the week ending December 20 decreased by 47,000 from last week's revised rate of 1.913 million (from 1.923 million) to 1.866 million.
    • The key takeaway from the report is that initial claims decreased unexpectedly, coming in below 200,000 for just the second time this year. This should be encouraging to a market that has grown more sensitive to signals from the labor market.
  • Weekly crude oil inventories decreased by 1.93 mln barrels after increasing by 405,000 barrels a week ago.
  • Weekly natural gas inventories decreased by 38 bcf after decreasing by 166 bcf a week ago.
• Commodities:
  • WTI crude: -0.6% to $57.62/bbl
  • Gold: -1.0% to $4342.30/ozt
  • Copper: -1.7% to $5.68/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1740
  • GBP/USD: -0.1% to 1.3456
  • USD/CNH: -0.2% to 6.9769
  • USD/JPY: +0.3% to 156.84
• The Day Ahead:
  • Bond and equity markets closed for New Year's Day
• Friday:
  • 9:45 ET: Final December S&P Global U.S. Manufacturing PMI (prior 51.8)
  • 10:00 ET: September Construction Spending (Briefing.com consensus -0.1%; prior 0.2%)