Treasury Yields Rise as Fed Rate Cut Bets Hit 88%

Have you ever watched a movie where the hero thinks everything is going one way, only for the plot to twist right when they least expect it? That’s pretty much the U.S. bond market this morning.

Yields are climbing – the 10-year Treasury touched 4.04%, the 30-year kissed 4.70% – yet at the same time traders have quietly pushed the probability of a Federal Reserve rate cut in two weeks to almost 88%. On the surface it feels contradictory. Higher yields usually signal confidence, not dovish bets. So what exactly is going on?

The Bond Market’s Mixed Signals Explained

Let’s start with the obvious: yields and prices move in opposite directions. When Treasury prices fall, yields rise. The modest pop we saw Monday morning tells us someone was selling bonds. But the reason behind the selling is where things get interesting.

In my experience watching fixed-income markets for the better part of two decades, there are three usual suspects when yields jump while rate-cut odds increase at the same time:

• A short-term technical bounce after an oversold rally
• Position squaring ahead of big economic releases
• Genuine worry that the Fed might actually pause if data comes in too hot

Right now, all three seem to be in play at once.

Why 88% Isn’t as Dovish as It Sounds

Yes, 88% sounds high. But flip it around – there’s still a 12% chance the Fed does nothing on December 10th. A month ago that “no-cut” probability was closer to 25-30%. In other words, the market has become more confident in a cut, but we’re reaching the point of diminishing returns. The easy dovish bets are mostly in.

When almost everyone agrees on the outcome, the remaining players often look for reasons to take the other side – especially heading into a packed data week. That’s classic “sell the news” setup territory.

The last 3-4% move in Fed pricing almost always meets resistance. Traders love fading consensus at the extremes.

This Week’s Economic Calendar Is Absolutely Loaded

Monday kicks off with ISM Manufacturing PMI – always a market-mover. Wednesday brings ADP private payrolls and ISM Services, Thursday weekly jobless claims, and Friday we finally get the delayed September PCE inflation print (yes, the Fed’s favorite gauge).

Any one of those reports could swing the December odds by 10-15 points in either direction. That’s why some investors are lightening up on duration heading into the gauntlet. Better to take a small yield give-up now than risk a violent reversal if the data surprises.

The Yield Curve Is Trying to Tell Us Something

Take a quick look at the spread between the 2-year and 10-year Treasury. It’s still inverted, but less so than it was in October. The 2s-10s spread sat around -45 basis points a few weeks ago; this morning it’s closer to -55 bps after the short-end sold off less aggressively than the belly.

In plain English: the market still expects lower short-term rates eventually, but the path there might be bumpier than some hoped. That’s a subtle but important shift.

Notice how the long end took the bigger hit? That often happens when growth or reflation fears creep in. The 30-year bond is particularly sensitive to expectations about future deficits and inflation.

What Happens If the Fed Actually Cuts?

Assuming the 88% becomes 100% after this week’s numbers, a 25 basis point cut is already more than priced in across most of the curve. The 10-year yield at 4.04% with a cut fully expected actually looks attractive on a historical basis – real yields remain solidly positive.

But here’s where it gets fun. If the Fed cuts and simultaneously upgrades its economic projections (the famous “higher for longer, but still cutting” scenario), longer-dated yields could easily push toward 4.5% or higher pretty quickly. We saw that exact dynamic play out in late 2023.

Positioning and Technical Levels to Watch

From a tactical standpoint, the 10-year has major support around 3.95-3.98%. A convincing break below there would likely trigger a rush back into bonds and push cut odds above 95%. On the upside, 4.15% has acted as stubborn resistance multiple times since August.

The fact that we’re bumping against the middle of that range tells me the market is genuinely uncertain – which is exactly when volatility tends to spike.

Bottom Line for Investors Right Now

If you’re sitting in cash earning 4%+, there’s no rush. If you’re underweight duration because you feared a hawkish surprise, this little yield back-up might be your entry point. And if you’re already long bonds betting on aggressive easing, well… maybe take a little profit before the data storm hits.

Personally, I’ve always found December Fed meetings to be dramatic affairs. The combination of year-end positioning, holiday-thinned trading desks, and the natural human desire to be “right” before everyone logs off for eggnog creates fireworks more often than not.

So buckle up. The bond market just reminded us it still has plenty of plot twists left in 2025.