The Era of Fiscal Dominance
The fiscal deficit has finally become the primary driver of the sovereign debt market. As of December 23, 2025, the complacency that defined the early-year bond rally has evaporated. Investors are no longer debating whether the Federal Reserve will cut rates; they are questioning who will absorb the relentless supply of Treasury issuance required to fund a $2 trillion annual deficit. The term premium, which sat in negative territory for much of the last decade, has staged a violent return to the forefront of fixed-income pricing. This is not a cyclical adjustment. This is a structural re-rating of what it means to hold long-term government debt.
Yesterday, the Treasury’s final auction of the year revealed a significant shift in appetite. Per data from Bloomberg’s real-time fixed income tracking, the ‘tail’ on the 20-year bond auction was the largest seen since the regional banking crisis of 2023. Primary dealers were forced to absorb 18 percent of the offering, a clear signal that the private market is demanding a higher margin of safety. The yield on the 10-year Treasury note has settled at 4.32 percent this morning, up from 3.80 percent just four months ago. The soft landing is no longer a theory; it is the baseline, but it has arrived with a sting in the tail: higher for longer is now the permanent reality.
The Death of the Negative Correlation
Diversification is failing in its traditional form. For forty years, bonds acted as a reliable hedge against equity volatility. That relationship broke in 2022 and remains fractured today. On December 22, 2025, we witnessed a simultaneous sell-off in both the S&P 500 and the long-end of the curve. This positive correlation suggests that the market is no longer fearing a recession, but rather a liquidity vacuum. When inflation remains sticky at 2.8 percent, as confirmed by the latest Bureau of Labor Statistics data, the ‘Fed Put’ becomes an expensive insurance policy that the central bank is unwilling to write.
Lindsay Rosner and the Barbell Imperative
Passive bond allocation is now a recipe for underperformance. Lindsay Rosner, head of multi-sector investing at Goldman Sachs Asset Management, has pivoted her thesis toward an aggressive barbell strategy. The logic is simple. You capture the 4.8 percent yield available in the one-month T-bill space while selectively picking ‘fallen angels’ in the high-yield corporate sector that have already been re-financed. Rosner’s recent commentary, archived via Goldman Sachs Insights, emphasizes that duration is a risk to be managed, not a destination to be sought. The goal is to avoid the ‘belly’ of the curve (the 5-to-7-year range), which is currently most vulnerable to the Treasury’s issuance calendar.
The Yield Curve Evolution: Dec 2024 vs Dec 2025
The Credit Spread Mirage
Credit spreads are currently priced for a state of economic perfection. The gap between AAA-rated corporates and the 10-year Treasury is at its tightest level in eighteen months. This is dangerous. It assumes that corporate earnings will continue to outpace the rising cost of debt service. However, the ‘maturity wall’ is approaching. Companies that issued debt at 2 percent in 2021 are now facing refinancing rates of 6 percent or higher. This 400-basis-point shock will manifest in the second quarter of the coming year. We are currently observing a divergence between liquid credit and private credit, where valuations are being held up by accounting choices rather than market reality.
| Security Type | Yield (Dec 23, 2025) | 12-Month Change | Volatility Index (VIX) |
|---|---|---|---|
| US 2-Year Treasury | 4.10% | -70 bps | 18.4 |
| US 10-Year Treasury | 4.32% | +52 bps | 18.4 |
| Investment Grade Corp | 5.45% | -12 bps | N/A |
| High Yield (Junk) | 7.80% | +45 bps | N/A |
Sovereign Risk and the Dollar
The geopolitical dimension of bond pricing cannot be ignored as we head into 2026. The weaponization of the dollar and the shift toward bilateral trade agreements have reduced the share of Treasuries held by foreign central banks to a fifteen-year low. Japan, the largest foreign holder of U.S. debt, has begun its own tightening cycle, pushing the 10-year JGB yield toward 1.2 percent. This creates a ‘yield floor’ for U.S. Treasuries. If a Japanese institutional investor can get a decent return at home without currency hedging costs, the marginal demand for U.S. duration collapses. This is the hidden engine behind the bear steepening of the curve.
Investors must stop looking at bonds as a monolithic asset class. The distinction between ‘money-like’ short-term debt and ‘risk-like’ long-term debt has never been sharper. The 2026 outlook hinges on the January 15 inflation print. If that number shows any acceleration, the 10-year yield will likely test the 4.75 percent level, a threshold that would trigger a systemic re-evaluation of equity risk premiums across the globe. Watch the 4.50 percent resistance level on the 30-year bond as the definitive signal for the first quarter of the new year.
