(Dec 11): US Treasuries rose after the Federal Reserve (Fed) lowered interest rates by a quarter-point for a third straight meeting and left the door open to additional policy easing in 2026.
Yields fell across the curve on Wednesday, sinking from multimonth highs. But the Fed-sensitive two-year note led the rally, tumbling almost eight basis points to 3.54%, for its largest one-day slide in two months. Treasuries extended gains after Fed Chair Jerome Powell highlighted concern about weaker hiring.
The upshot is that the meeting offered relief for bond investors who’d been bracing for a stronger indication from the Fed that it would pause after this move as it awaited more economic data. Traders stuck to their bets that the Fed will lower rates in two quarter-point steps next year, even as the central bank’s newly released projections — its so-called dot plot — indicated only one such reduction in 2026.
“Bottom line, everyone was looking for a hawkish cut and it was less so than expected, so maybe it’s a bit of a relief rally in Treasuries,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management.
The central bank lowered the benchmark lending rate to a range of 3.50%-3.75%, as expected. Powell’s remarks on the labour market offset his broader view that the Fed’s combined 0.75 percentage point in easing since September leaves the central bank “well positioned” to wait for more clarity on the job market and inflation. He also said he expects the inflationary impact of higher US tariffs will fade soon.
Two regional Fed presidents — Austan Goolsbee from Chicago and Jeff Schmid from Kansas City — preferred to keep rates unchanged. Governor Stephen Miran, whom Trump appointed to the central bank in September, dissented again in favor of a larger, half-point reduction.
See also: US trade deficit unexpectedly shrinks to smallest since 2020
June timing
Traders are now fully pricing in the next quarter-point cut in June and a second by the fourth quarter. The dollar touched the lowest since October as yields sank. Stocks rose, in part after Powell touted the resilience of the economy and higher productivity.
Treasuries briefly trimmed gains after Powell during his press conference said the current level of rates is “within the broad range of neutral,” suggesting the Fed could pause and assess how much further easing is required.
See also: Hassett says room for Fed to cut more than 25 basis points
However, he also raised the likelihood that US payroll increases are likely being overstated, and that helped pull two-year yields down to session lows.
“It was Powell’s comments on revisions to payroll and jobs data that really drove the outperformance of the short-end,” said John Brady, managing director at RJ O’Brien. “And keep in mind that we see two payroll reports between now and the Jan 29 meeting,” the Fed’s next policy decision.
US government debt also strengthened as officials authorised fresh purchases of short-term Treasury securities to maintain an “ample” supply of bank reserves. The Fed will begin buying US$40 billion of Treasury bills per month starting Dec 12 as it rebuilds reserves in the financial system, which dwindled while it was tightening its balance sheet.
“We were looking for a January announcement, but it looks like the Fed decided to pull the trigger earlier,” for reserve-management purchases, said Gennadiy Goldberg, head of interest-rate strategy at TD Securities. The announcement “is more dovish for markets.”
The focus of traders now turns to next week’s release of a delayed November employment report, followed by a consumer price index reading for last month.
“The overall message from the press conference was a message of flexibility and data-dependence even as the Fed funds rate is in the range of most estimates of neutral,” said Priya Misra, a portfolio manager at JPMorgan Investment Management. “Chair Powell sounded concerned about the weakening in the labor market and that suggests that the bias for easing remains.”
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