Treasury Yields Close 2025 Lower Despite Final Day Surge

The US government bond market concluded a tumultuous 2025 on a paradoxical note. While the benchmark 10-year Treasury yield finished the year lower than where it began—driven by Federal Reserve rate cuts and a slow moderation in inflation—the final trading session of the year witnessed a distinct spike in yields.

On Wednesday, the 10-year Treasury yield climbed over 3 basis points to settle at 4.163 per cent. The 2-year Treasury, which is more sensitive to immediate monetary policy expectations, also rose by more than 2 basis points to 3.475 per cent. This final day reversal was catalysed by fresh data indicating a labour market that refuses to crack, challenging the consensus that economic headwinds are gathering strength.

The catalyst for the year-end sell-off in bonds (which pushes yields higher) was the release of initial jobless claims data. For the week ending December 27, filings dropped to 199,000, significantly undershooting the 220,000 forecast by economists and falling 16,000 from the previous week.

This resilience suggests that despite the aggressive restructuring of the federal workforce and shifting trade policies under the current administration, the broader economy remains on solid footing. Christopher Rupkey, chief economist at FWDBONDS, highlighted the disconnect between recessionary fears and the hard data.

"The filings for first-time jobless benefits are volatile during the holidays and adverse winter weather in many years, but the lack or any material weakness in the jobs market is striking in that there is no sign the economy is anywhere near the shores of recession," Rupkey noted.

He further elaborated that this strength is likely to persist into the new year. "The labour market strength with low-firing definitely, low-hiring maybe, is likely to carry forward into 2026 because so far, the Trump economic agenda with its radical changes to trade and immigration policy, along with the firing of thousands of Federal government workers, has not sent the economy off the rails as many economists forecast."

The price action on the final day encapsulates a year defined by chopping volatility. After starting 2025 above the 4.5 per cent mark, 10-year yields reacted violently to policy announcements, dropping sharply in April following tariff adjustments before oscillating around the 4 per cent handle for the latter half of the year.

The release of the Federal Reserve’s meeting minutes on Tuesday offered further insight into this volatility. The minutes from the December 9-10 meeting revealed a central bank that is deeply divided. While the committee voted to lower interest rates, the decision was a "closer call" than the final tally suggested. This lack of unanimity has left traders constantly recalibrating their expectations for 2026.

As markets close for New Year’s Day, the focus shifts to the trajectory of monetary policy in the coming months. The bond market is currently pricing in sticky-but-trending-lower inflation, yet the robustness of the labour market complicates the case for aggressive easing. Following the release of the minutes, traders have slightly increased bets that the Fed will execute another rate cut in April.

However, with yields reacting sensitively to weekly data points, the path forward remains data-dependent. The interplay between the administration's fiscal policies and the Fed's monetary tightening will likely keep bond volatility elevated well into the first quarter of 2026.