BAF NEWS

U.S. Bonds on Track for Strongest Year Since 2020

The rally in core fixed income has real momentum. The Bloomberg U.S. Aggregate Bond Index is up about 6.7% in 2025, the strongest showing since 2020. According to available reports, the rebound follows a rocky 2022 and mixed 2023, 2024 performance. ^[1]

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The tone is firm, not euphoric. The index’s advance has outpaced short-term Treasury bills this year, underscoring the move back into duration risk. Meanwhile, the 10-year Treasury yield hovered near 4.147% as of the latest referenced Friday. ^[1]

By the numbers:

• Bloomberg U.S. Aggregate Bond Index: about +6.7% YTD (2025). ^[1]
• Best annual pace since 2020. ^[1]
• 10-year Treasury yield: ~4.147% as of the latest referenced Friday. ^[1]

The upshot: Bonds are again delivering ballast for diversified portfolios. However, sustainability depends on the policy path and incoming data.

Federal Reserve Rate Cut Expectations Boost Bonds

Expectations for additional Fed easing have helped steady Treasuries. On Nov. 17, most Treasury yields fell by one to two basis points as traders leaned toward another cut next month. Moreover, the bid recaptured part of last week’s losses in the long end. ^[2]

“Most Treasury yields declined one to two basis points,” as markets weighed guarded rate-cut optimism. That shift supported prices across the curve. Notably, this dynamic also aligns with reporting that cut expectations have underpinned 2025’s bond gains. ^[2]

The mechanics matter. Lower policy rates reduce discount rates and can boost bond valuations, especially for longer maturities. Still, if the Fed signals patience, rate-sensitive sectors may retrace.

Market‑Implied Odds for Fed December Cut Ease

Investors have tempered near-term cut odds. Money markets recently priced roughly a 49% chance of a December 2025 cut, down from about 60% last week. Consequently, traders are approaching year-end risk with more caution. ^[3]

The moderation reflects persistent inflation concerns and mixed signals from officials. As the Financial Times noted, Wall Street reined in cut bets amid those pressures. Therefore, sentiment looks more balanced than earlier this month. ^[3]

“Traders price in a 49% chance of a Fed rate cut in December,” according to recent coverage. That midpoint view leaves room for data to surprise either way. ^[3]

The upshot: Even as bonds rally, the policy outlook is not one‑way. A softer labor market or tame inflation could revive cut odds, upside surprises could do the opposite.

Treasury Yields Decline as Bonds Recover

On Nov. 17, Treasuries edged higher. Most yields slipped by 1, 2 basis points as the market retraced part of last week’s rise in long-dated yields. Notably, 30‑year yields had been pushed to the highest level in more than a month during that prior move. ^[2]

Zoom in

Price action has been two‑sided. Long-end yields rose last week, then eased as cut hopes steadied the bid. Even so, traders remain sensitive to any shift in the path of policy or inflation. ^[2]

By the numbers:

• Nov. 17, 2025: most Treasury yields −1 to −2 bps. ^[2]
• Traders’ expectations for a December cut underpinned the move. ^[2]
• Market now prices ~49% chance of a December cut, vs ~60% last week. ^[3]

Context and caveats

• Pros: Easing policy generally supports core bonds and reduces refinancing stress. Additionally, lower yields can aid housing and corporate borrowing.
• Cons: Stickier inflation could slow or delay cuts. In turn, that would pressure duration and re‑steepen volatility at the long end. ^[3]
• Positioning: Investors are cautious as they await U.S. economic data into year‑end. Therefore, the next prints may drive outsized moves. ^[3]

What’s next:

• Watch the December policy meeting and leading inflation and labor readings. The reaction function remains data‑dependent, according to available reports. A positive bond year can still coexist with tactical setbacks. ^[3]
• Monitor long‑end supply and term premium dynamics. If the curve’s back end cheapens again, gains could consolidate before year‑end. ^[2]

The upshot: Bonds are having their best year since the pandemic era. But the next leg hinges on whether data justify another cut, or simply a pause to assess conditions. For now, the rally rests on expectations, tempered, but still supportive. ^[1]