Favor Mid -To-Long Term Bonds
Chart of the Week:
U.S. Tariffs Rise and Revenue Increases, but Ultra-Long Yields Stay Elevated
U.S. effective tariffs have climbed to 17%, marking the sharpest annual shift in decades, with year-end levels the highest since the 1930s. This has reshaped global supply chains. We estimate tariffs will drag GDP growth by 0.3ppt, though increased AI investment offsets much of the impact. Tariffs generate over USD 200bn in revenue—4% of total government income, vs. 2% in 2024.
Market Recap 1:
Final Week of 2025: U.S. Equities Soft; Europe Holds Steady
In the final week of 2025, with limited corporate news flow and no fresh catalysts—and shortened trading sessions due to holidays—investor participation was muted. All three major U.S. indices extended mild declines. Energy was the only sector posting a modest gain, with some rotation into traditional sectors.
Market Recap 2:
Yield Curve Steepens; Precious Metals Highly Volatile at Year-End
Minutes from the December FOMC meeting showed notable division among officials on the policy path, raising the likelihood of a pause at an upcoming meeting. Most officials believe shifting policy toward neutral would help avoid further labor-market deterioration. Conversely, easing too aggressively while inflation remains elevated risks undermining the Fed’s credibility on the 2% target.
What’s Trending:
Trade War Spurs Market Volatility, but Panic Creates Ideal Entry Points
Although Trump announced steep tariffs on Liberation Day, triggering a trade war and a sell-off in risk assets—with the VIX spiking to around 52—sentiment improved as the U.S. and multiple countries later reached agreements, driving a rebound in global equities, including U.S. stocks.
In Focus 1:
The Fed Cut 75 bps, but Ultra-Long Yields Remain Elevated
The Fed resumed rate cuts in the second half, delivering 75 bps of easing. U.S. Treasuries across most maturities posted solid performance YTD. However, yields beyond 20 years have not fallen meaningfully—30Y yields even edged higher—so total returns on ultra-long bonds were roughly equal to their coupons, meaning almost no price-driven gains.
In Focus 2:
Short-Dated Bond Returns to Fall in a Cutting Cycle; Favor Medium-to-Long Tenors for Long-Term Positioning
U.S. unemployment rose to 4.6% in November, the highest since September 2021. Given rising slowdown risks, we estimate the Fed still has room to cut, with yields across maturities likely to decline. The 10Y yield may bottom at 3.7–3.9% in the first half. Long-dated Treasuries will remain out of favor, keeping the curve steep.
