Monthly Market Monitor

Macro

At its December Federal Open Market Committee meeting, the Federal Reserve (Fed) cut its policy rate by 25 basis points (bps) to a range of 3.50% - 3.75%. There were three dissents from Fed officials, two favored no change in the federal funds rate and one sought a 50-bps cut. During his post-meeting press conference, Fed Chair Jerome Powell suggested that the committee is now in a place where they can assess the impact of the cumulative 75 bps in cuts over the last three meetings.

Additionally, the Fed announced that it would purchase short-term U.S. Treasury securities (UST) in an effort to maintain reserve balances at ample levels. Initial expectations are that this would entail monthly purchases of approximately $40 billion in Treasury bills over the next few months.

On the jobs front, November nonfarm payrolls rose 64,000. This followed October's -105,000 plunge, which was the worst decline since December 2020. That said, manufacturing jobs fell to their lowest level since March 2022 and demonstrated that reshoring efforts have not boosted hiring to date in the sector. The unemployment rate climbed to a four-year high of 4.6%, partially influenced by an increase in the labor force participation rate, which measures people employed or actively looking for work. Meanwhile, average hourly earnings increased slightly at just 0.1% month over month, signaling easing wage pressures.

November's Consumer Price Index (CPI) rose 0.1% month over month (+2.7% year over year) and core CPI rose 2.6%; both measures came in below expectations. Housing CPI eased to 3.5% year over year, its lowest level since 2021. However, government shutdown-related data gaps may have influenced inflation measures.

Credit

As is typical, new issuance in December was modest and most activity occurred early in the month ahead of the holidays. For the calendar year 2025, supply finished near $1.6 trillion, trailing only 2020 in overall issuance. Looking ahead, expectations are for robust supply in 2026, with January forecasted to be very active.

Investment grade spreads narrowed to 73 bps, driving 24 bps of excess return for the month. BBB-rated issues outperformed BB-rated, with excess returns of 35 bps and 27 bps, respectively.¹

Structured

Issuance of asset-backed securities in December was light, at just $7 billion, and generated excess returns of 12 bps. Spreads tightened 3 bps as the sector shook off bouts of volatility tied to isolated subprime headlines.

Meanwhile, mortgage-backed securities' spreads tightened 8 bps, generating 47 bps of excess returns in December. The sector remains supported by declining interest rate volatility, which has encouraged demand from high-quality-oriented investors.

Chart of the Month

U.S. Treasury Yield Curve Through 2025

 

• The UST yield curve steepened throughout 2025. The 2-year and 30-year yield spread increased from 54 bps at the beginning of the year, to 137 bps at the end of 2025.
• The 2-year yield fell 77 bps, which is almost an identical change to the federal funds rate. Longer-term yields remained elevated during the year, driven by various factors including inflation uncertainty and fiscal deficit concerns.

As of 12/31/2025. Source: Bloomberg L.P. View accessible version of chart.