Market Recap – Q4 2025, “SHUTDOWN”

The United States experienced the longest federal government shutdown on record, beginning in October and stretching into mid-November. That disruption temporarily halted key economic data releases and brought uncertainty into markets and policy late in the year. When the dust settled, final estimates showed growth in the economy for the third quarter of 2025. The BEA third estimate of Q3 Real GDP was 4.4%, reflecting an increase in exports and government spending. Core and headline inflation came out higher in December, led by shelter and food.  Unemployment increased versus a year ago, and the labor market stayed tight with 7.1 million job openings for the 7.5 million unemployed.

The FOMC lowered the target range for the federal funds rate by 50 bps in Q4 to 3.50%–3.75%, citing a cooling labor market and inflation expectations remaining consistent with the 2 percent goal. The Committee initiated purchases of short-term treasuries to maintain ample supply of reserves.

Short-term rates fell, intermediate-term rates fell slightly less, and long-term rates rose, steepening the yield curve. The long end of the curve remained elevated, and the belly and 7-10 year outperformed.

Relative performance among spread sectors varied over the fourth quarter. Quality outperformed in corporates over the period, though higher-spread BBBs accounted for the best performance in 2025.  The risk premium over like-maturity Treasurys on BBB-rated corporate bonds within the Aggregate increased from 97 to 101 bps. Structured securities outperformed corporate bonds in Q4. Among securitized assets, Agency mortgage-backed securities surged, ending the best year for the Bloomberg U.S. MBS index since 2002. 

On January 30, 2026, President Trump nominated Kevin Warsh to be the next Chair of the Federal Reserve, with the intention that Warsh would succeed Jerome Powell when Powell’s term as Fed chair ends in May 2026. The nomination still requires Senate confirmation. Federal funds futures indicate 0.55% in expected rate cuts by year end 2026.