The head of fixed income at Vanguard has issued a cautionary note on rising volatility in U.S. Treasury markets, citing heightened uncertainty around federal fiscal policy and inflation expectations. The remarks come as benchmark yields have surged over 40 basis points in the past month.
- 10-year U.S. Treasury yield reached 4.92% in January 2026, up 42 basis points from December 2025
- Probability of no Fed rate cuts by mid-2026 now stands at 68%, up from 40% in November 2025
- Bloomberg U.S. Aggregate Bond Index declined 2.3% year-to-date through January 20, 2026
- Vanguard clients reduced average portfolio duration by 12% since October 2025
- January 15 10-year Treasury auction saw a 17% drop in non-competitive bidding volume
- Foreign demand for U.S. debt continues to soften, with Japan and China adjusting reserve holdings
Vanguard’s senior fixed income strategist highlighted growing stress in the U.S. Treasury market, warning that recent price swings reflect deeper structural concerns. The 10-year Treasury yield climbed to 4.92% in late January 2026—the highest level since 2023—driven by fiscal expansion fears and shifting expectations for Federal Reserve rate cuts. This marks a 42-basis-point increase from December 2025 levels, underscoring investor unease. The strategist emphasized that the market is pricing in a 68% probability of no rate cuts by mid-2026, up from just 40% in November. This shift reflects increasing skepticism about the central bank’s ability to balance inflation control with economic growth. As a result, long-duration bond portfolios have suffered significant mark-to-market losses, with the Bloomberg U.S. Aggregate Bond Index down 2.3% year-to-date through January 20. Institutional investors, including pension funds and insurance companies with large fixed-income allocations, are reassessing duration exposure. Vanguard’s own client-facing models show a 12% reduction in average portfolio duration across its retail bond funds since October 2025. The trend indicates a strategic pivot toward shorter maturities and enhanced liquidity buffers amid uncertain macro conditions. Market participants are also monitoring Treasury auction results closely. The latest 10-year note sale on January 15 attracted $43 billion in non-competitive bids—down 17% from the prior month—suggesting declining demand from key foreign buyers like Japan and China. The decline in appetite coincides with a broader realignment of global reserve management strategies.