The volatility of U.S. Treasury bonds is about to reach the largest annual decline since 2009, Is the "anchor of global asset pricing" heading towards a downward trajectory?

An index measuring the volatility of the US Treasury market is currently moving towards the 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 mitigating the downside risks to the US economy, which also means that the volatility of the US bond market in early 2026 will also trend towards a moderate decline. As volatility continues to decline, if the Trump administration in 2026 attempts to suppress the potential upside in the 10-year US Treasury yield, which is known as the "global asset pricing anchor," by reducing the issuance volume or proportion of long-term bonds, actively shifting towards issuing short-term bonds, 2026 may be a "turnaround year" for the 10-year and longer-term US Treasury assets that have been ignored by investors and have shown weak performance in recent years. If funds continue to flow into the 10-year and longer-term US Treasury bonds, it indicates that the "global asset pricing anchor" is expected to continue to decline, a trajectory that 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, has dropped significantly to around 59 as of last Friday's US stock market close, reaching the lowest level since October 2021. This volatility measurement index has seen a significant drop from its historical high level of around 99 at the end of 2024 and is expected to record one of the steepest annual declines since the index began in 1988, second only to the sharp downturn in 2009 after the financial crisis. As shown above, the volatility of the US Treasury market is significantly declining as the end of 2025 approaches. Since April, the volatility index has seen a significant surge due to the market disruption caused by President Donald Trump's global aggressive tariff policies. Subsequently, with a significant reduction in global tariffs and a rational shift in the tariff stance of the Trump administration, as well as continued expectations of interest rate cuts by the Federal Reserve, the 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 "soft landing" that the Federal Reserve has been focusing on - including cooling inflation, a resilient labor market, the strongest third-quarter GDP growth in two years, and the Fed's interest rate cuts to ensure steady development of the labor market, which has helped reduce significant uncertainty in financial markets. John Briggs, Senior US Rate Strategist at Natixis Corporate and Investment Banking, said, "We don't really have a data point out there that is going to be hugely troubling in causing market volatility." He also pointed out that volatility tends to be very low at this time of year. Since September, with significant signs of cooling in the labor market that has been strong for a long time, the Federal Reserve has announced three consecutive rate cuts to prevent the labor market from falling into sustained negative growth and significantly dragging down the prospects of a "soft landing" for the US economy. Bond traders and interest rate futures traders are actively pricing in two 25-basis-point rate cuts in 2026, with the first move expected to take place at the June monetary policy meeting. "The Fed's path of an easier monetary policy has been well telegraphed at this point, even if the timing is unsettled. The Wall Street consensus continues to focus on lower policy rates in 2026 and slightly steeper yield curve, a setup that can endure alongside low volatility as debates rage around inflation stickiness, economic growth resilience, and fiscal risks of budget deficits," said Brendan Fagan, Senior Macro Strategist at Bloomberg Strategists. With the lack of significant data to drive bond market volatility in the week sandwiched between the Christmas holiday in 2025 and the New Year holiday in 2026, traders expect the bond market volatility to continue to trend towards a moderate decline as trading activity significantly decreases at the beginning of 2026. Briggs expects that the volatility of the US Treasury market will remain at historically low levels, at least until the beginning of the new year. Briggs added in an interview, "It's worth watching because January can sometimes be surprising or challenge widely held market views." Is it finally time for long-term US Treasury bonds to find a good opportunity for configuration? Is the "global asset pricing anchor" brewing a new downward trajectory? If the US Treasury Department in 2026 does indeed reduce the net supply of 10-year and longer-term bonds as expected by the market to significantly weaken the "term premium" and uses short-term bills to take on a greater financing "buffer" role, in an environment of declining volatility, the 10-year and longer-term US Treasury bonds, which have been significantly underperforming in recent years compared to short-term bonds, may see better price performance and even become candidates for a "turnaround year". US Treasury Secretary Janet Yellen and President Trump have both said that they are closely monitoring the 10-year US Treasury yield, so this data is crucial for the pricing of long-term financing costs and the trend of risk-free rates in the US. This is also why bond traders widely expect the Treasury Department led by Yellen to significantly increase the issuance proportion of short-term US bonds in the over $30 trillion US Treasury market, in order to lower the yield of long-term US Treasury bonds against the backdrop of continuously rising US debt. Therefore, as volatility continues to trend towards a moderate decline in 2026, if the Trump administration shifts towards significantly increasing the proportion of short-term US bond issuance, rather than issuing long-term bonds on a large scale as in the past few years, 10-year and longer-term US Treasury bonds will show greater value in comparison to short-term US bonds. Daniel Ivascyn, fund manager at Pimco, recently said, "Lower rate expectations in the US and rising global economic uncertainty will drive risk-averse investors towards fixed-income US Treasury markets." "As the Fed eases policy, you will see a situation where credit risk in some economies may be rising while your cash yields are falling. And this may continue to support high-quality long-duration fixed income assets, such as 10-year US Treasury assets." According to the bond market strategy outlook of top Wall Street investment institutions for 2026, long-term US Treasury bonds will have better investment prospects than short-term US Treasury bonds. The logic behind this mainly lies in the fact that the price increase brought about by the tariff policy will eventually be confirmed as a temporary inflationary disturbance in the first half of 2026, Trump's nominee for Federal Reserve Chair will lean dovish, and short-term US Treasury bonds have been overpriced due to excessive expectations of rate cuts, while the long-term US Treasury bonds are still affected by the "term premium" volatility caused by deficit expectations in 2025. In addition, compared to short-term US Treasury bonds, long-term US Treasury bonds have not fully priced in the Fed's interest rate cut path in 2026 and the Treasury Department's tendency to issue short-term US Treasury bonds and reduce the supply of long-term US Treasury bonds - at least the market clearly sees that the Trump administration is unwilling to see long-term US Treasury yields remain high and is gradually showing a willingness to shrink budget deficits. In addition, long-term US Treasury bonds near the 4% yield level in anticipation of the potential "AI bubble storm" in 2026 are extremely attractive, making long-term US Treasury bonds more resilient compared to strong performance of short-term bonds in recent years. In large panic events like the bursting of the internet bubble, long-term government bonds with higher yields are more attractive than short-term bonds, which is why the massive inflow of safe-haven funds caused by the AI bubble panic sweeping the world from the end of October to November is flowing back into the 10-year and longer-term US Treasury bonds. Morgan Stanley, a Wall Street financial giant, recently stated that the market trading logic in 2026 may fully return to "bad news is bad news," and 10-year and longer-term US Treasury bonds, which have price elasticity potential and yield advantages, will once again become the cornerstone of investment portfolios as they were before the pandemic, meaning that long-term US Treasury bonds in 2026 are likely to enjoy both the influx of safe-haven funds brought about by significant emotional fluctuations such as the "AI bubble" and the long-term institutional capital inflows resulting from the "gentle landing narrative of the US economy" (referring to the US economy being just right, with moderate GDP and consumer spending growth and long-term stable moderate inflation trends, while benchmark interest rates are on a downward trajectory). According to the latest forecasts from Franklin Templeton Investments and TD Securities, the yield of the 10-year US Treasury bond by the end of 2026 could drop to below 3.5%, indicating that strong demand is likely to drive prices further upwards. Therefore, if global funds continue to flow into the 10-year and longer-term US Treasury bonds, it means that the "global asset pricing anchor" is expected to continue to decline, 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 yield on the 10-year US Treasury bond was around 4.15%. From a theoretical perspective, the yield of the 10-year US Treasury bond is equivalent to the risk-free rate indicator r in the important valuation model for stocks - the DCF valuation model. When there are no major changes in other indicators (especially the expected cash flows on the numerator side) - such as during a lack of positive catalysts like an earnings season, with the numerator in a vacuum due to lack of positive catalysts, if the denominator level is higher or continuously operating at historical highs, the valuations of risky assets like tech stocks closely related to AI, high-yielding corporate bonds, and cryptocurrencies may be on the brink of collapse. Conversely, if there are no major negative macro fundamentals or negative news on the AI computing industry chain recently, and the yield curve of the 10-year US Treasury bond enters a new round of decline, the global stock markets are very likely to move towards a new bull market trajectory ushered in by the strong "AI bull market narrative" led by major tech giants such as Nvidia, Meta, Google, Oracle, TSMC, and Broadcom, as well as leaders in the AI computing industry chain.