Long-Term Treasuries Slide After Market Posts Its Strongest Year in Five

Long-dated U.S. Treasuries opened 2026 under pressure after notching their strongest yearly performance in five years, as investors reassessed how further Federal Reserve rate cuts could reignite inflation concerns.

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Selling was modest, but it pushed the 30-year Treasury yield up nearly three basis points to around 4.87% by Friday’s close. Earlier in the session, yields briefly touched 4.88%, marking the highest level since September. In contrast, shorter-term yields which tend to track the Fed’s policy rate more closely were flat to slightly lower on the day, reflecting a more cautious outlook for near-term monetary policy.

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This divergence echoed a trend that took shape throughout last year. As the Fed began cutting rates in September, delivering three quarter-point reductions to its benchmark federal funds target, yields on short-dated Treasuries dropped sharply. Longer-term bonds, however, were far less responsive, with yields falling only marginally or even drifting higher at times.

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Beyond expectations for additional rate cuts from a central bank that may soon see new leadership, long-term yields are facing persistent upward pressure from structural issues. Chief among them are the United States’ challenging long-term fiscal trajectory and ongoing signs of economic resilience. Solid economic data and equity markets hovering near record highs have reinforced the view that growth remains durable, limiting the appeal of long-duration bonds.

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Volatility in the bond market is also expected to pick up after sinking to its lowest levels since 2021. According to James Athey, a portfolio manager at Marlborough Investment Management, investors should brace for sharper swings as markets struggle to pin down the Fed’s next moves.

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“There will be periods of significant volatility as uncertainty around the future path of monetary policy resurfaces,” Athey said. Still, he added that elevated valuations across U.S. equities make bonds an attractive hedge for diversified portfolios, even amid near-term turbulence.

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Activity in interest-rate derivatives reflects this uncertainty. Recent trading has seen strong demand for options designed to protect against the possibility that the lower bound of the Fed’s policy rate could eventually fall from roughly 3.5% to zero.

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That positioning contrasts with expectations embedded in interest-rate swaps, which currently suggest investors see the policy rate bottoming closer to 3% by the end of the year.

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At the same time, the broader economic backdrop continues to complicate the outlook for bonds. The U.S. economy has shown remarkable resilience, while inflation remains above the Fed’s 2% target.

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That combination has kept upward pressure on yields, a trend that could persist as fiscal stimulus measures passed last year continue to work their way through the economy. Recent data underscored the challenge: inflation accelerated at its fastest pace in two years, muddying the case for further rate cuts in the near term.

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Despite these headwinds, Treasuries delivered a strong performance last year. The U.S. Treasury Index posted a return of more than 6%, highlighting how quickly sentiment can shift when policy expectations change.

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Weakness was not limited to the U.S. bond market. Government debt across other major economies also slipped on Friday, particularly in markets that were closed midweek and needed to catch up with earlier declines in Treasuries.

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Seasonal factors added to the pressure, as January is traditionally one of the busiest months for new corporate bond issuance. Fresh supply from companies often competes directly with government bonds for investor demand, temporarily weighing on prices.

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In Europe, Germany’s 10-year yield climbed as much as six basis points to around 2.91%, while the U.K.’s equivalent rose by a similar margin to roughly 4.54%. Australian government bonds fared even worse.

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Ten-year yields there jumped about eight basis points amid speculation that rising commodity prices could strengthen the country’s growth outlook and eventually push the central bank toward higher interest rates.

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Taken together, the early moves in 2026 suggest bond investors are entering the year with renewed caution. With inflation risks lingering, fiscal concerns unresolved, and policy expectations in flux, long-term yields may remain volatile even after last year’s strong rally.

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