Taxable Bond Snapshot December 2025

Key Takeaways:

• The US Aggregate Bond Index returned -0.15% in December, marking only the third monthly decline of the year. Yields fell at the front end of the curve while rising further out and credit spreads tightened modestly. Despite the late-year pullback, the Index finished 2025 with a strong 7.30% gain.
• The Federal Reserve (Fed) delivered a widely anticipated but hawkish 25 basis point (bps) rate cut, signaling a higher bar for additional easing. In its updated Summary of Economic Projections, it raised its outlook for economic growth while modestly lowering its inflation expectations.
• Market conditions remained constructive. Interest rate volatility declined to its lowest level since October 2021 and equities posted their third consecutive year of elevated returns, providing a supportive backdrop for risk assets.

TAXABLE BOND MARKET UPDATE & OUTLOOK

• The fixed income market gave back some ground in December but delivered a solid performance for 2025 as a whole. Bonds returned 7.30% for the year, their best annual gain since 2020. Expectations for Fed easing, strong corporate fundamentals, and attractive all-in yields supported steady investor demand throughout the year.
• Core Personal Consumption Expenditure (PCE) inflation averaged 2.8% over the past year, remaining above the Fed’s 2% goal. However, policymakers continue to forecast further disinflation. Market-based measures reflected similar optimism, with both 2- and 5-year breakeven inflation rates declining over the month and the year.
• Treasury yields declined at the front end of the curve but longer maturities rose, resulting in a bear steepening. The 2-year/10-year segment reached its steepest level since early 2022. While the short end continued to track Fed policy lower, higher long-term yields reflected a rising term premium amid a resilient economy that may ultimately require higher rates to compensate investors.
• Investment-grade (IG) corporate bonds outperformed duration-matched Treasuries, as spreads tightened by 3 bps. On an absolute basis, however, corporates lagged due to their longer duration profile. Total 2025 issuance reached $1.6 trillion, second only to 2020’s banner year of $1.75 trillion. Dealers expect another robust year of supply, potentially approaching prior highs.
• High-yield (HY) bonds outperformed the broader IG market and posted their eighth consecutive month of gains. Spreads tightened over the year, supported by low default rates and solid net inflows. New issuance totaled $328 billion in 2025, the highest level since 2021 and the fourth-busiest year on record.
• The securitized sector finished the year on a strong note, outperforming duration-matched Treasuries. Gains were led by agency mortgage-backed securities (MBS) where low seasonal supply was met with strong demand. The Fed pausing its tightening of financial conditions through quantitative measures and interest rate volatility declining sharply were also positives. The outlook for the securitized sector remains constructive, with many of the technical drivers of performance expected to persist into the new year.
• Despite robust issuance in December, which capped a record year for the primary market, asset-backed securities (ABS) outperformed, as spreads tightened across subsectors.
• The preferreds market outperformed for the month, benefiting from spread tightening. Fundamentals for the banking sector remain strong while the potential for deregulation and reduced net new issuance should continue to support the asset class.