Treasury Yields Rise as Investors Sharpen Focus on Fed Rate Cut Decision

Gerik

Summary:

U.S. Treasury yields climbed slightly on December 1 as traders increased bets on a December interest rate cut, with market expectations now pricing in an 88% chance of a 25-basis-point reduction...

Yields Tick Up Despite Growing Rate Cut Expectations

On the first trading day of December, U.S. Treasury yields moved modestly higher across maturities, even as investors grew more confident in the likelihood of a Federal Reserve rate cut at its December 9–10 meeting. The 10-year Treasury yield increased by 2.3 basis points to 4.044%, while the 30-year bond yield rose 3 basis points to 4.702%. Meanwhile, the 2-year note saw a smaller gain of less than one basis point, climbing to 3.497%.

These moves came despite the fact that traders are increasingly positioning for a rate cut, with the CME FedWatch Tool showing an 88% probability of a 25-basis-point reduction, up from 85% just one trading day prior. This inverse movement yields rising while rate cut expectations increase suggests investors are adjusting portfolios in anticipation of a softer economic outlook paired with short-term repositioning.

All Eyes on Economic Data Ahead of Fed Blackout

With Federal Reserve officials in a mandated blackout period ahead of the December FOMC meeting, investor attention has shifted firmly to incoming macroeconomic data. The week began with the ISM Manufacturing PMI, released Monday morning, and will be followed by a packed slate of reports that could influence final market pricing before the Fed’s decision.

Key upcoming releases include the ADP Employment Report and ISM Services PMI on Wednesday, weekly initial jobless claims on Thursday, and the long-delayed Personal Consumption Expenditures (PCE) index for September on Friday. These data points will be crucial in shaping expectations about inflation trends, labor market health, and broader economic resilience.

Given that the PCE index is the Fed’s preferred inflation gauge, its release could carry significant weight, particularly as policymakers deliberate whether conditions justify easing monetary policy further.

Market Dynamics Reflect Mixed Sentiment

The modest uptick in yields despite elevated rate cut expectations reflects a complex mix of positioning and caution. While long-duration bonds such as the 30-year have seen price selling (leading to rising yields), short-term instruments like the 2-year remain more tightly anchored, reflecting closer alignment with Fed policy expectations.

This divergence suggests that while markets broadly anticipate monetary easing, there is still some skepticism about the Fed’s path in early 2026. Investors appear to be balancing near-term dovish sentiment with longer-term concerns over persistent inflation or potential re-acceleration in demand.

The movement in Treasury yields signals a market cautiously leaning toward dovish policy action while remaining responsive to data. As the Fed remains silent ahead of its final meeting of 2025, the bond market is functioning as a real-time barometer of investor sentiment. With critical economic reports due in the days ahead, market volatility could increase, particularly if inflation or labor market data surprises to the upside. Until then, yields may continue to drift, reflecting both anticipation and uncertainty in equal measure.

Source: CNBC

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