Treasuries started this week with the policy-sensitive two-year yield at 3.51% and the 10-year rate at around 4.17%
by Michael MacKenzie and Ye Xie
The big debate in the US Treasury market over the extent of Federal Reserve interest-rate cuts ahead is about to heat up with a string of pivotal economic data releases.
This week will go a long way to filling in the data void created by the US government shutdown, with the delayed announcements of monthly employment and inflation figures, and then early January brings more key jobs data. The reports will help answer the overarching question entering 2026 of whether the Fed is close to being done easing, after three straight cuts, or if it has to move more aggressively.
There’s a lot at stake for bond traders, who are betting the central bank will lower rates twice next year to support the job market and the growth outlook, even as inflation remains stubbornly elevated. That’s one more reduction than the Fed is indicating, and if market expectations are right it could set the stage for another solid run for Treasuries, which are headed for their best year since 2020.
“The single most important data point for next year” may be Tuesday’s employment figures, said George Catrambone, head of fixed income at DWS Americas. “It’s all I’m looking at, and where the labor market goes so do rates.”
Catrambone is among those anticipating the Fed will have to cut more deeply — potentially a lot more, judging by weakness in labor indicators ahead of this week’s release — and he bought Treasuries when yields spiked to multimonth highs last week.
Treasuries started this week with the policy-sensitive two-year yield at 3.51% and the 10-year rate at around 4.17%. The gap between the pair closed at 66 basis points on Friday, the highest since January 2022.
Yields pulled back from their recent peaks last week after Chair Jerome Powell highlighted concern about weaker hiring in his Wednesday press conference following the Fed’s quarter-point cut to a range of 3.5% to 3.75%.
Against that backdrop, traders are building options positions that would pay off if market sentiment shifts to a rate cut in the first quarter. For now, another reduction isn’t fully priced in until mid-year, with a second one in October.
Data First
It’s all intensifying the focus on the data straight ahead, which will cover November and partial data for October. The economy likely added 50,000 nonfarm jobs in November, according to the median forecast in a Bloomberg survey. A delayed release last month showed a gain of 119,000 jobs in September. That beat estimates, although the unemployment rate rose to 4.4%, the highest since 2021.
For WisdomTree’s Kevin Flanagan, this week’s jobs release may carry less weight because the shutdown complicated the data collection, which for him shifts the focus to the report due early next month, ahead of the Fed’s Jan. 28 policy decision.
“The bar has been raised for the Fed to cut rates at the next meeting in January,” said Flanagan, the firm’s head of fixed income strategy. “You would need to see visible evidence of cooling in the jobs report.”
What Bloomberg Strategists say...
“For the bond momentum to extend, the jobs report on Dec. 16 will be the next data hurdle. With consensus at 50,000 for the nonfarm payrolls gain, a fall in payrolls could help extend the rally and pull forward the first full rate-cut pricing from June to April.”
—Ed Harrison, Bloomberg Markets Live strategist. Read more here.
A November reading that’s in the range of September’s figure would likely spark a selloff that pushes the 10-year yield to 4.25%, Flanagan said. He’s also in the camp that the Fed is close to being done cutting, citing studies showing 3.5% is a so-called neutral rate, one that neither stimulates nor restricts the economy.
That view echoes comments from Powell last week that the Fed’s benchmark is now “within a broad range of estimates” of a neutral setting, which to some underscored that the scope for additional easing is limited. Traders, for their part, see the Fed ending this easing cycle at around 3.2%, according to a swaps-market proxy.
Instead of a bullish market that stands to generate solid total returns in 2026, a Fed that’s mostly sidelined in the face of sticky inflation suggests more of a range ahead for Treasuries, with the bulk of returns coming from coupon payments around 4%.
New Chair
Officials are also divided over the policy path and, just like investors, are waiting for data to light the way. One of last week’s dissenters, Chicago Fed President Austan Goolsbee, said on Friday that he voted against a rate cut because he wanted to see more inflation figures.
There’s one other big event looming: Investors’ focus may soon shift from the economic data to Powell’s successor when his term ends in May, amid significant pressure from President Donald Trump for much lower rates. Trump’s search is nearing its final stages.
A new chair “means the Fed tilts even more dovish, regardless of the economy running a bit hot,” said Janet Rilling, head of the Plus Fixed Income team at Allspring Global Investments.
“The cover could end up being in the employment market,” she said. “It’s not our expectation that it’s going to be a big jump in unemployment, but nonetheless, if it’s looking a little softer, that could be the cover for cutting rates.”
What to Watch
- Economic data: (Timing of releases delayed during the shutdown remains in flux)
- Dec. 15: Empire manufacturing; NAHB housing market index
- Dec. 16: ADP weekly employment; November nonfarm payrolls, unemployment rate and average hourly earnings, partial October data; retail sales; New York Fed services business activity; S&P Global US manufacturing, services and composite PMIs; business inventories
- Dec. 17: MBA mortgage applications
- Dec. 18: Initial jobless claims; November consumer price index; real average hourly/weekly earnings; Philadelphia Fed business outlook; Kansas City Fed manufacturing activity; TIC flows
- Dec. 19: Existing home sales; U. of Michigan sentiment and inflation expectations; Kansas City Fed services activity
- Fed calendar:
- Dec. 15: Governor Stephen Miran; New York Fed’s John Williams
- Dec. 17: Governor Christopher Waller; Williams; Atlanta Fed’s Raphael Bostic
- Auction calendar:
- Dec. 15: 13-, 26-week bills
- Dec. 16: Six-week bills
- Dec. 17: 17-week bills; 20-year bonds
- Dec. 18: 4-, 8-week bills; 5-year TIPS
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