Annual Surprise Asset? The 30-year US Treasury bond in 2025 is resilient, and may face even more severe challenges next year.

Notice that, in 2025, the annual financial asset non-American 30-year treasuries took the crown. Indeed, its increase cannot be compared to the astonishing rise of stocks related to artificial intelligence or gold. In fact, its price has not increased at all this year. But considering the numerous challenges it has faced in the past 12 months, it should have suffered heavy blows. Yet, at the end of the year, this asset is trending towards closing at a level similar to the beginning of the year - this alone is enough to astonish. If someone had said on January 1st that gold would soar nearly 70% and surpass $4,000 per ounce, Wall Street would experience its largest tech boom in a quarter of a century, and the financial environment would be the most lenient in three years, you might have expected long-term bond yields to rise significantly. If someone had also said that U.S. inflation would be above target for the second year in a row, the U.S. dollar would plummet by 10%, the U.S. "term premium" would reach a ten-year high, and the once sacred and untouchable concept of central bank independence would be shattered by the continued attacks of the Trump administration on the Federal Reserve, how would investors feel? If that weren't enough, President Donald Trump's "Big Beautiful Law" is expected to increase the budget deficit by trillions of dollars over the next decade, thereby boosting "dollar devaluation" trading. Despite all these challenges, the 30-year U.S. bond yield currently remains at around 4.8%, almost back to its levels at the beginning of the year. Investors prefer a 5% yield Of course, the 30-year yield has not been without fluctuations during the period. Indeed, the Fed's 75 basis point rate cut this year was expected to push down long-term yields - the 10-year yield did fall by nearly 50 basis points. However, cutting rates in a situation of sustained and significantly high inflation always easily limits the downside space for ultra-long-term yields. The yield curve has steepened - the 2-year/30-year curve has reached its steepest point in four years - but this is almost entirely driven by changes in short-term rates. Compared to similar international assets, U.S. long-term bonds have performed well this year, albeit somewhat dimmed by the 10% decline in the U.S. dollar due to currency adjustments. German 30-year bond yields recently hit their highest level since 2011, rising nearly 100 basis points this year; while Japanese 30-year bond yields also reached a historical high, rising over 100 basis points this year. How to explain this relative strength? For a product seen as one of the safest and most liquid long-term assets globally, despite continuous macro noise, a 5% yield is clearly very attractive to many investors. Demands from "real money" buyers such as pension funds, mutual funds, and insurance companies remain strong, as they need long-term assets to match their long-term liabilities. Duration worries This demand ensured that the 12 30-year bond auctions conducted by the U.S. Treasury this year proceeded relatively smoothly. The Treasury sold a total of $276 billion in debt, once a month. According to Exante Data, the average bid-to-cover ratio (a measure of demand) for these 12 auctions was 2.37, very close to the average of around 2.38 for the past 50 auctions since November 2021. Domestic institutional investment funds subscribed to about 70-75% of the bonds for sale, while foreign investors increased their purchases in the second half of the year, with the share in November exceeding 15% for the first time since the beginning of last year. On the other hand, in these auctions, the Treasury paid lower yields than the pre-market levels on the day of the auction only three times, while paying higher yields six times. Investors usually require a certain premium in the auctions. Despite the resilience of U.S. long-term bonds this year, they will still face serious challenges next year. The global background for fixed income duration remains difficult - risk premiums, inflation risks, and debt supply are all rising, doubts about the AI productivity narrative are eroding confidence, and concerns about the independence of the Federal Reserve are also intensifying. Therefore, the 30-year U.S. bond will face challenges similar to those of 2025, but this time the degree may be more severe. Its resilience may now truly be put to the test.