NEW YORK, December 22, 2025
Falling Bond Yields Are Quietly Fueling the Stock Market’s Rise
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The slide in Treasury yields has been a important, though often overlooked, factor in the stock market’s gains this year.
- The 10-year Treasury yield is on track to end 2025 well below its January peak, currently at 4.14% as of Friday, Dec. 19, down from around 4.80%.
- A lack of clear inflationary pressure following tariff increases, coupled with dovish Federal Reserve policy, is supporting the bond market.
- The bond market’s relative calm is providing a tailwind for stocks, and its future direction will likely be crucial for equity performance in 2026.
Trying to pinpoint exactly what makes stocks go up or down is notoriously difficult, but the recent decline in Treasury yields has undeniably played a role in this year’s equity rally. The big question now is whether this supportive trend will continue into 2026.
The 10-Year Yield: A Key Indicator
Consider the 10-year Treasury yield, arguably the world’s most important interest rate due to its broad influence on lending. While the 10-year yield has experienced volatility throughout 2025,the overall trend has been downward.
Despite concerns about tariffs and the rising U.S. government budget deficit,the 10-year yield is poised to finish 2025 considerably lower than where it began: 4.14% on Friday, Dec. 19, a drop from roughly 4.80% in January. Expectations of a slowing economy are contributing to this trend.
Fed Policy and Inflation’s Role
The Federal Reserve’s more cautious approach to interest rates has also provided support.although the central bank has limited direct influence over long-term yields, three rate cuts this year have helped to keep inflation in check. Consumer inflation expectations are also showing signs of easing, according to recent polling by the University of Michigan. The New York Fed’s survey of consumers revealed that “Median inflation expectations remained unchanged at the one-year-ahead horizon at 3.2%.”
looking Ahead to 2026
Market expectations for further Fed rate cuts in the new year are uncertain. Fed funds futures currently indicate a high probability of rates remaining unchanged at the January FOMC meeting, but the prospects for a March cut appear more promising.
Keeping the bond market content will be vital for the stock market in 2026. “A tame CPI will reinforce the Fed is focused on protecting the employment market. And that means a Fed ‘put’ is now in place for the economy,” said Tom Lee, head of research at Fundstrat. “Simply put, if the Fed is concerned about downside risks to the economy, the Fed ‘put’ comes into play and this would be for stocks to rise.”
Since President Trump announced higher tariffs in April, the stock market’s rise has been closely correlated with the decline in the 10-year yield.
While predicting the future is unfeasible, its reasonable to expect that Treasury yields in 2026 will significantly influence stock performance. For now,markets appear agreeable assuming yields will remain within a certain range. The key task in the new year will be monitoring incoming data and reassessing the outlook for bonds, as the fate of stocks may hang in the balance.
