(The opinions expressed here are those of the author, a

columnist for Reuters)

By Jamie McGeever

ORLANDO, Florida, Dec 22 (Reuters) - The financial asset

of 2025 is the 30-year U.S. Treasury bond.

True, it hasn't come close to matching the eye-popping gains

of artificial intelligence-related stocks or gold. In fact, its

price hasn't risen at all this year. But given what it has faced

in the past 12 months, it should have been clobbered. Yet at the

time of writing, it is on course to end the year where it

started - and that alone is remarkable.

If ‌you were told on January 1 that gold would rocket

nearly 70% through $4,000 an ounce, Wall Street would experience

the biggest tech boom in a quarter of a century and financial

conditions would be the loosest in three ​years, you might expect

long-dated bond yields to rise.

And what if you were also told that U.S. inflation would

remain above target for another year, the ‍dollar would slump

10%, the U.S. "term premium" would rise to its highest in over a

decade, and the once-sacrosanct notion ⁠of central bank

independence would be shattered ⁠by the Trump administration's

persistent attacks on the Federal Reserve?

If that's not enough, President Donald Trump's "One Big

Beautiful Bill" is set to add trillions to the budget deficit

over the next decade, fuelling the "dollar debasement" trade.

Despite ‌all that, the 30-year yield is around 4.8%, pretty

much where it started the ​year.

INVESTORS LIKE 5%

The 30-year yield has moved in the interim, of course.

Granted, the Fed's 75 basis points of rate cuts this year might

have been expected to lower longer-dated yields - the 10-year

yield is down nearly 50 bps. But equally, cutting rates with

inflation ⁠persistently and comfortably above target is always

liable to limit the downside for ultra-long ‍yields.

Yield curves have ​steepened - the 2s/30s curve is the

steepest in four years - but that is almost entirely due to

moves at the front end.

And relative to its international peers, the U.S. long bond

performed well this year, although that shine is dulled in

currency-adjusted terms by the dollar's 10% decline.

Germany's ‍30-year bund yield recently hit its highest since

2011, and is up almost 100 bps this year, while the 30-year

Japanese government bond yield has never been higher and is up

more than 100 bps this year.

What explains this relative strength? A yield of 5% for what

is, despite all the macro noise, still considered one of the

safest and most liquid long-dated assets in the world, is

clearly attractive to many investors. Demand from "real money"

buyers such as pension funds, mutual funds and insurance

companies, who need to match their long-term liabilities with

long-term assets, has been consistently strong.

DURATION VEXATION

That demand ensured the U.S. Treasury's 12 auctions of

30-year bonds this ​year generally passed ‍off without incident.

Treasury sold $276 billion of debt in total, one in each

calendar month. The average bid-to-cover ratio over the 12

sales, a measure of demand, was 2.37. That's pretty close to the

average of around 2.38 over the past 50 auctions going back to

November 2021, according ​to Exante Data.

Domestic institutional investment funds took up around

70-75% of those bonds on the block, and foreign investors

increased their purchases in the second half of the year, taking

more than 15% in November for the first time since early last

year.

On the other hand, Treasury paid lower yields than

prevailing pre-sale market levels on the day in only three of

these auctions, and higher yields in six. Investors generally

demanded a premium for buying at auction.

But as hardy as the U.S. long bond has been this year, it

faces daunting challenges next year. The global backdrop for

fixed income duration remains a tough one - risk premia,

inflation risks and debt supply are all rising, doubts about the

AI productivity story continue to gnaw, ​and Fed independence

concerns are mounting.

So the 30-year bond will face similar challenges to those it

saw in 2025, only likely more severe this time around. Its

resilience may now truly be put to the test.

(The opinions expressed here are those of the author, a

columnist for Reuters)

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