2025 Quick Lookback & Forward Considerations

by Doug Drabik of Raymond James, 12/18/25

We are getting close to the time when forecasts for next year will suggest how we should invest to optimize our portfolio. But wait – we are at that time when we should realize that last year’s forecasts weren’t exactly on target. In fairness, economic forecasts are difficult because of the enormous number of financial variables and the diverse, reactive behaviors of governments, corporations, and individuals. Fortunately, long-term fixed income planning does not rely on our predictive powers but rather on proper diversification, risk assessment, and maturity schedules that optimize cash flow and earnings potential for individual goals.

Key factors to the 2025 bond market

  • Inflation remained in the headlines. Core Personal Consumption Expenditure (PCE) is the Federal Reserve’s preferred measure of inflation. After declining in March and April, PCE rose for four consecutive months and currently sits at 2.82% (September), higher than the Fed’s goal of 2.0%. The average PCE number since 2000 is 2.09%. The 2025 average is 2.8%.
  • Market pundits have pointed out kinks in the employment data, noting, for example, weakness in nonfarm payroll data from May through August. September showed a significant reversal. Despite the few below-average months, the unemployment rate has remained remarkably in a favorable range. Unemployment rates between 4% and 6% are considered to be within the full employment range. The US Unemployment rate is currently at 4.4%.
  • Gross Domestic Product (GDP) measures a country’s economic health, showing the market value of all goods and services produced. The US has fared well versus most economic powers, with a GDP of 2.1%. Although the economy is far from “running hot”, production remains modestly consistent.
  • Treasury rates remained little changed over the 20 to 30-year maturities. Rates were down by 40 to 70 basis points through 10 years in maturity. Many 2025 forecasts put the 10-year Treasury at ~5.0% (our forecast was ~4.25%). The 10-year Treasury is ~4.16% this morning on December 15. Note that although interest rates have declined slightly over the year, they remain elevated relative to the last two decades.

US 10 year treasury

Key considerations for the bond market in 2026

  • The Fed will likely be pulled in opposite directions as it tends to its dual mandate. Price stability is negatively influenced by inflation, and the Fed will likely stay diligent until it reaches the desired 2.0% target. Employment dips will be monitored closely, although, despite media hype, the unemployment level is currently in a good position.
  • There is an argument that specific business sectors and particular consumers are already in a recessionary state, but that the remainder of industries and consumers are propping up the economy. Consumer spending will heavily influence how GDP holds up in 2026.
  • As long as interest rates stay elevated, investors can secure known cash flows and benefit from income opportunities. It appears that although short-term rates may drop, the fixed income curves will remain steep, with the long end remaining stable or even rising. Steep curves reward clients with higher yields as maturities extend.