After delivering their strongest returns in five years, Treasury bonds have entered 2026 in a holding pattern. The benchmark 10-year yield has settled near 4.19%, up modestly from year-end but well below the peaks seen in late 2024 when it briefly touched 5%.

For bond investors who rode the rally through 2025, it was a lucrative year. As measured by the Bloomberg US Treasury index, the market returned more than 6%—a stark reversal from the punishing losses of the post-pandemic rate hiking cycle. But as the calendar turns, the easy gains may be behind us.

The Fed's Balancing Act

At the heart of the Treasury market's uncertainty is the Federal Reserve's evolving policy stance. After cutting rates three times in 2025, bringing the benchmark to a range of 3.5% to 3.75%, the central bank has signaled a more cautious approach for the year ahead.

Minneapolis Fed President Neel Kashkari captured the mood on Monday when he said the central bank is "pretty close to neutral right now"—suggesting the aggressive easing cycle may be nearing its end.

"My guess is we're pretty close to neutral right now."

— Neel Kashkari, Minneapolis Federal Reserve President

Market pricing tells a slightly different story. Traders are betting on two rate cuts in 2026—one in April and one in September—compared with the Fed's own projection of just one. This gap between market expectations and Fed guidance creates potential for volatility as economic data either validates or contradicts these assumptions.

The Leadership Question

Adding another layer of uncertainty is the impending change at the Fed's helm. Chair Jerome Powell's term expires in May, and President Trump is expected to announce his nominee in the coming weeks.

Treasury Secretary Scott Bessent confirmed that the Fed chair selection will come in January, with National Economic Council Director Kevin Hassett and former Fed Governor Kevin Warsh viewed as the leading candidates. The choice matters enormously for bond investors: Hassett has argued for more aggressive rate cuts, while Warsh is seen as somewhat more hawkish.

A dovish pick could push yields lower as markets price in faster easing. A more conventional choice might leave current rate expectations largely intact. Either way, the announcement will likely trigger meaningful moves in Treasury prices.

Inflation: The Persistent Worry

For all the focus on Fed policy, inflation remains the fundamental driver of bond returns. The Fed's preferred core PCE measure most recently stood at 2.8%—still above the central bank's 2% target and a reminder that the inflation battle isn't fully won.

Complicating the picture is the uncertainty around tariff policy. While conventional wisdom suggests tariffs should be inflationary, research released Monday by the San Francisco Fed challenged this assumption, finding that historical tariff shocks often reduced rather than increased inflation by depressing overall demand.

If tariffs prove less inflationary than feared, it could give the Fed more room to cut rates—a bullish scenario for bonds. But if price pressures prove stickier, Treasury investors could face renewed headwinds.

What Strategists Are Saying

Wall Street forecasters are generally expecting Treasury yields to stay rangebound in 2026, with the 10-year yield oscillating between 3.75% and 4.25%.

JPMorgan analysts forecast 10-year yields ending the year at 4.35%—slightly above current levels and implying modest price declines for long-duration bonds. The forecast reflects expectations that economic growth will remain resilient and that the Fed will cut rates less aggressively than markets currently expect.

2026 Treasury Outlook

  • Current 10-year yield: ~4.19%
  • JPMorgan year-end forecast: 4.35%
  • Expected trading range: 3.75% - 4.25%
  • Market-implied Fed cuts: Two (April and September)
  • Fed's projected cuts: One

Positioning for Different Scenarios

Given the uncertainty, bond strategists recommend a balanced approach rather than making aggressive duration bets. Key considerations include:

  • If inflation falls faster: Long-duration Treasuries would rally as rate cut expectations increase
  • If inflation proves sticky: Short-duration bonds and cash offer protection against rising yields
  • If growth disappoints: Treasuries would benefit from flight-to-safety flows and aggressive Fed easing
  • If growth surprises higher: Corporate bonds and equities might outperform safe-haven government debt

The Data Week Ahead

This week offers several data points that could move the Treasury market. The December jobs report on Friday will be particularly important, with economists expecting payrolls to grow by approximately 140,000—a meaningful slowdown from recent months.

If the labor market shows more significant weakness, it could trigger a rally in Treasuries as investors price in faster Fed easing. Conversely, a stronger-than-expected report might push yields higher.

For now, bond investors are playing a waiting game—watching the data, monitoring Fed commentary, and positioning for what promises to be a year of significant policy shifts. After the gains of 2025, patience and flexibility will likely be rewarded more than bold directional bets.