The volatility of US Treasury bonds is about to create the largest annual decline since 2009. Is the "anchor of global asset pricing" heading towards a downward trend?

An index measuring the volatility of the US Treasury market is moving towards its largest annual decline since the aftermath of the financial crisis. At the same time, the new round of interest rate cuts initiated by the Federal Reserve in October is aimed at containing downside risks to the US economy. This also means that the volatility of the US bond market in early 2026 is expected to trend towards a moderate decline. As volatility continues to decrease, if the Trump administration in 2026 aims to minimize the potential upside for the 10-year US Treasury yield, also known as the "anchor for global asset pricing," by reducing the issuance size or proportion of long-term bonds and actively turning to short-term bonds, then 2026 may be a "reversal year" for long-term US Treasury assets that have been overlooked and weak in recent years. If funds continue to flow into the 10-year and longer US Treasury bonds, it suggests that the "anchor for global asset pricing" is likely to continue declining, which is a significant positive factor for stocks, cryptocurrencies, and high-yield corporate bonds. The latest statistics show that the ICE BofA MOVE Index, a core indicator measuring expected volatility in the bond market, dropped significantly to around 59 as of last Friday's US stock market close, marking its lowest level since October 2021. This volatility measure index has seen a significant drop from its historical high level of around 99 at the end of 2024 and is likely to record one of the steepest annual declines since the index began in 1988, second only to the significant decline following the financial crisis in 2009. As shown in the chart above, the US Treasury market volatility has experienced a significant decline as 2025 comes to an end. Since April, when the volatility surged due to the disruptive global tariffs policy initiated by US President Donald Trump, it has seen a significant decline following substantial reductions in global tariffs, a rational shift in the Trump administration's tariff stance, and continued expectations of interest rate cuts from the Federal Reserve. This volatility indicator has shown a significant decline in bond, currency, and stock markets. A series of moderate economic data suggests that the US economy is approaching the Fed's desired "soft landing" - including gradually cooling inflation, a resilient labor market, the strongest GDP growth in two years in the third quarter, and the Fed's rate cuts to support stable labor market development, which have helped reduce significant uncertainties in the financial markets. John Briggs, senior US rate strategist at Natixis Corporate and Investment Banking, said, "We haven't seen any data that would trigger violent market fluctuations." The strategist also pointed out that volatility is typically very low at this time of year. Since September, the Fed has announced interest rate cuts in three consecutive monetary policy meetings to prevent the labor market from falling into sustained negative growth, which could heavily impact the prospects of a "soft landing" for the US economy. Bond traders and interest rate futures traders are actively pricing in expectations of two more 25 basis point rate cuts in 2026, with the first expected to happen at the June monetary policy meeting. "The Fed's dovish monetary policy path has been fully conveyed, although timing is still controversial. The Wall Street consensus is still focused on lower policy rates and a slightly steepening yield curve in 2026. This situation can continue amid ongoing debates around inflation stickiness, economic growth resilience, and fiscal risks of budget deficits, alongside low volatility, said Brendan Fagan, senior macro strategist at Bloomberg Strategists. The week between the Christmas holiday of 2025 and the New Year holiday of 2026 lacks significant data to drive volatility in the bond market, so traders expect that trading activity will significantly decrease at the beginning of 2026, resulting in a more moderate downward trend in bond market volatility. Briggs expects that bond market volatility will remain at historically low levels until early in the new year. Briggs added in an interview, "Its worth noting that January can sometimes bring surprises, or challenge widely held market consensus views." Is it finally time to invest in long-term US bonds? Is the "anchor for global asset pricing" signaling a new downward trajectory? If the US Treasury Department in 2026 does indeed reduce net supply of 10-year and longer-term bonds as the market expects to significantly weaken the "term premium" and increase issuing short-term T-bills as a financing "buffer," it may lead to better price performance for long-term US Treasury assets compared to short-term bonds, making 2026 a potential "reversal year." US Treasury Secretary Bassett and Trump himself have stated that the 10-year Treasury yield is a major focus for them. Therefore, this data is critical for pricing US long-term financing costs and trends in risk-free rates. This is why bond market traders widely expect the Treasury Department led by Bassett to significantly increase the proportion of short-term US bond issuances in the over $30 trillion US Treasury market to lower long-term bond yields amidst a continued rise in US debt levels. Therefore, as volatility continues to decline in 2026, if the Trump administration significantly increases the proportion of short-term US bond issuances rather than heavily issuing long-term bonds as in recent years, long-term US bonds may show better value compared to short-term US bonds. Daniel Ivascyn, fund manager at Pimco, recently said, "Lower rate expectations in the US and increasing global economic uncertainties are driving risk-averse investors to the fixed-income US Treasury market." "As the Fed eases policy, you will see a situation where credit risks in some economies may be rising while your cash yield is declining. This could continue to support high-quality long-duration fixed income assets, such as 10-year Treasury assets." According to the latest bond market strategy outlook from top Wall Street institutions, long-term US bonds are expected to have better investment prospects than short-term US bonds in 2026. The logic behind this is that the upward pressure on prices due to tariff policies is likely to be confirmed as temporary inflationary disruptions in the first half of 2026, the upcoming Fed chair nominee is expected to be dovish, short-term US bonds are already overpriced due to rate cut expectations, and long-term US bonds are still influenced by the fluctuations in "term premium" brought about by deficit expectations. In addition, compared to short-term US bonds, 10-year and longer-term US bonds have not fully priced in the Fed's interest rate cut path in 2026, as well as the Treasury Department's tendency to issue more short-term US bonds and reduce the supply of long-term US bonds - at least the market clearly sees that the Trump administration does not want long-term US bond yields to remain high and can also perceive the Trump administration's gradual willingness to reduce budget deficits. Furthermore, the attractiveness of long-term bonds around the 4% yield mark in the potentially imminent "AI bubble storm" of 2026 makes them very appealing, as they are considered more resilient compared to short-term bonds amidst the ongoing debates around inflation continuity, economic growth resilience, and fiscal risks. In major panic events such as the bursting of the internet bubble, high-yielding long-term Treasury bonds are more attractive compared to short-term bonds, which is why in late October to November, the massive influx of risk-off funds brought about by the AI bubble panic flowed back to the 10-year and longer-term US bonds. J.P. Morgan recently stated that the market trading logic in 2026 may fully return to "bad news is bad news." 10-year and longer-term US bonds, which have both price elasticity potential and yield advantages, are expected to return to the status of a portfolio cornerstone as seen in the inflation stable periods of the first twenty years before the pandemic. This also means that in 2026, long-term US bonds may benefit from the inflow of risk-off funds driven by major emotional swings such as the "AI bubble," as well as the flow of long-term institutional funds driven by the narrative of a "goldilocks-style soft landing" for the US economy (referring to the US economy being neither too hot nor too cold, maintaining moderate growth in GDP and consumer spending and a sustained trend of moderate inflation, while benchmark interest rates are on a downward trajectory). According to the latest forecasts from top Wall Street asset managers Franklin Templeton Investments and Douglas Securities, the 10-year US bond yield may decline to below 3.5% by the end of 2026, which means that strong demand is likely to drive prices higher. Therefore, if global funds continue to flow into the 10-year and longer-term US bonds, it suggests that the "anchor for global asset pricing" is likely to continue declining, a trajectory that is a significant positive factor for stocks, cryptocurrencies, and high-yield corporate bonds. As of last Friday's US stock market close, the 10-year US bond yield was around 4.15%. From a theoretical perspective, the 10-year US bond yield is equivalent to the risk-free rate indicator r, which is an important valuation model in the stock market - the Discounted Cash Flow (DCF) valuation model. When other indicators (especially the expected cash flows in the numerator) do not undergo significant changes - such as during a reporting season where the numerator is in a vacuum due to lack of positive catalysts - if the denominator is at a higher level or operating at historically high levels, valuation of risk assets such as tech stocks closely linked to AI, high-yield corporate bonds, and cryptocurrencies may face a collapse. Conversely, if there are no major negative macro fundamental changes or in the AI computing power industry chain, and the 10-year US bond yield enters a new downward curve, global stock markets are likely to continue their upward trajectory led by major tech giants such as NVIDIA, Meta, Google, Oracle, TSMC, Broadcom, and leaders in the AI computing power industry chain under the strong narrative of an "AI bull market."