Key Points
- U.S. Treasuries had their best year in 2025 since 2020, with a return of over 6%.
- The 10-year Treasury yield dropped to 4.15% on the first trading day of 2026.
- Most investors expect the Federal Reserve to cut interest rates again this year.
- President Trump is expected to appoint a new, more “dovish” Fed chair in May.
U.S. government bonds started the new year on a positive note, building on their best annual performance in five years. The yield on the 10-year Treasury note, which moves in the opposite direction of its price, dropped slightly to 4.15%. This marks a solid start to 2026 after a very successful 2025, during which a key sector index returned more than 6%.
The big question now is whether this rally can continue. Most market participants expect the Federal Reserve to cut interest rates again this year. This expectation has been amplified by the prospect that President Trump will appoint a new, more “dovish” Fed chair when Jerome Powell’s term ends in May. A dovish leader is someone who favors lower rates to keep the economy growing.
However, the U.S. economy is still surprisingly strong. Data released just last week showed that the economy grew at its fastest pace in two years. This resilience makes it harder for the Fed to justify short-term rate cuts.
Investors will be watching the next batch of economic data, including a report on the manufacturing sector, to gauge better where things are headed.
While U.S. bonds performed well, other global markets were not as fortunate. Bond yields in Germany and the U.K. both rose on Friday. January is usually a busy month for new bond sales, which tend to push yields higher as supply increases.
For now, the bond market is in a bit of a tug-of-war. The hope for lower interest rates is pushing prices up, while the reality of a strong economy and new bond sales is pulling them down. How this plays out in 2026 will be one of the biggest stories for investors to watch.
