December Jobs Report: Treasury Yields and Duration Analysis

The December employment report released on January 9 capped the weakest year for job growth since 2003 (excluding recessions)—full-year 2025 delivered just 584,000 positions, a sharp deceleration from 2.0 million in 2024. December's 50,000 gain fell short of the 73,000 consensus, while October and November were revised lower by a combined 76,000. Yet the unemployment rate unexpectedly declined to 4.4% from 4.5%, and average hourly earnings rose 0.3% month-over-month (3.8% year-over-year), suggesting the Fed has room to maintain its patient stance.

The JOLTS report (January 7) reinforced the cooling theme: job openings fell to 7.146 million—missing the 7.60 million forecast—with the openings-to-unemployed ratio at 0.9, its lowest since March 2021 and well below the summer 2022 peak of 2.0. The ADP private payrolls report showed just 41,000 additions, with professional and business services shedding 29,000 positions.

Credit Spreads and High Yield Market Analysis

Credit markets demonstrated notable resilience despite absorbing the heaviest investment-grade issuance week since the pandemic. Global dollar-denominated bond sales reached approximately $260 billion through January 7—a record start to any year—with single-day issuance of $37 billion on Monday alone as 20 borrowers rushed to fund ahead of earnings blackouts. Notable transactions included Orange SA ($6 billion, 5-tranche), Broadcom ($4.5 billion), and GM Financial, all meeting robust demand with minimal new issue concessions. High yield spreads tightened 8 bp to 230 bp, reaching the tightest levels of the trailing 5-year period.

Federal Reserve Policy Outlook

The Federal Reserve enters 2026 in wait-and-see mode following its December rate cut to 3.50%-3.75%. The December FOMC minutes revealed a closely divided Committee, with several participants indicating they could have supported holding rates steady—a continuation of the policy uncertainty we observed at the October 2025 FOMC meeting. Market pricing now reflects just one to two cuts totaling 50 basis points for 2026, with the first cut not fully priced until June. CME FedWatch shows only 15% probability of action at the January 28-29 meeting.

Richmond Fed President Tom Barkin noted on January 6 that policy is "within the range of estimates of neutral" and that "both sides of our mandate bear watching"—a balanced assessment that suggests no near-term urgency for additional accommodation. The dollar index (DXY) strengthened to 99.14, its highest level in a month, as rate differentials widened versus other major currencies where easing cycles continue.

Tariff Uncertainty and Supreme Court Decision

Markets closely monitored the Supreme Court's potential ruling on the administration's emergency tariff authority. The Court's January 10 opinion day passed without a decision; the next potential ruling date is January 14. Lower courts ruled in 2025 that tariffs implemented under the International Emergency Economic Powers Act (IEEPA) were issued without proper authority, and prediction markets assign roughly 28% probability that the Court upholds current implementation.

Treasury Secretary Bessent expressed confidence the administration can collect similar tariff revenues via alternative statutory mechanisms if needed. Goldman Sachs estimates tariffs added approximately 0.5 percentage points to 2025 inflation and projects an additional 0.3 percentage points in the first half of 2026. Resolution of this uncertainty would remove a key overhang for both rates and credit markets.

Week Ahead: CPI and Fed Communications

• CPI Inflation (January 13): December CPI expected at 0.3% monthly core, with year-over-year core at 3.2%. Any upside surprise could further reduce rate cut expectations and pressure front-end yields higher.
• Supreme Court (January 14): Next potential tariff ruling date. A decision either way would resolve a key source of policy uncertainty affecting both inflation expectations and corporate margins.
• PPI Inflation (January 14): Producer prices provide insight into pipeline inflation pressures and corporate cost dynamics heading into earnings season.
• Retail Sales (January 15): December data will reveal holiday spending strength and provide the first clean read on consumer behavior post-election.
• FOMC Meeting (January 28-29): No policy change expected, but updated economic projections and Powell's press conference will clarify the Committee's reaction function for 2026.

Investment Positioning and Global Context

The US economy's relative outperformance continues to attract capital flows even as the Fed's easing cycle pauses. The European Central Bank cut rates to 2.5% in December and is expected to continue easing, while the Bank of Japan maintains its cautious normalization path. This policy divergence supports dollar strength and compresses Treasury term premium, particularly at the long end where foreign demand remains substantial. For additional context on yield curve dynamics during periods of policy uncertainty, see our November 2025 analysis.

For duration positioning, the curve's bull flattening creates opportunities in intermediate maturities where carry remains attractive relative to reinvestment risk. The 5-year point at the 28th percentile offers better value than the 30-year (85th percentile) for investors concerned about fiscal trajectory. Credit positioning requires selectivity given spread compression; BB-rated credits offer modestly better risk-adjusted returns than single-B names where default risk remains elevated in rate-sensitive sectors.