Have you ever watched a market that looks completely asleep on the surface, yet underneath everyone is frantically repositioning for a big move? That’s exactly what U.S. Treasuries felt like Tuesday morning.
Yields barely moved—literally a couple of basis points here and there—but the story isn’t the wiggle, it’s the quiet confidence building among traders that the Federal Reserve is about to deliver one more rate cut before the year ends.
A Dramatic Swing in December Cut Expectations
Let’s start with the number that caught my eye when I fired up the screens before sunrise: the market-implied probability of a 25 basis point cut at the December FOMC meeting now sits at 87.2%. That’s according to the ever-reliable CME FedWatch tool.
Rewind less than two weeks and that same probability had collapsed to around 35%. In market time, that’s an eternity ago, but in calendar time it’s almost comical how fast sentiment flipped.
I’ve been around long enough to know these swings usually don’t happen in a vacuum. Something—or more likely a combination of things—convinced traders the Fed has room to ease one more time in 2025’s final act.
Where Are Yields Actually Trading?
As of early Tuesday, the benchmark 10-year Treasury yield was hovering right around 4.10%—basically unchanged from Monday’s close. The 2-year note, which is more sensitive to near-term Fed moves, sat quietly near 4.18%.
Across the curve it was the same story: little ticks up or down, nothing dramatic. Bond traders were clearly in wait-and-see mode rather than panic-or-party mode.
Why the Sudden Optimism for a Cut?
Several puzzle pieces seem to have fallen into place over the past ten days.
- Recent inflation readings have continued to drift lower, giving the Fed comfort that price pressures are truly tamed.
- The labor market, while still solid, is showing the first hairline cracks—enough to make policymakers think twice about staying on hold.
- Global growth worries, especially in Europe and parts of Asia, are putting downward pressure on yields everywhere, and the U.S. rarely stays completely insulated.
- Perhaps most importantly, Fed speakers (before entering the pre-meeting blackout) repeatedly emphasized they still see room for “gradual normalization” if data cooperate.
Add it all up and the path of least resistance started looking like one more cut to close out the year.
The Data Calendar That Could Make or Break the Bet
We’re heading into one of those weeks where every economic release feels like it carries extra weight. With Fed officials in blackout, the numbers will do all the talking.
Here’s what investors are laser-focused on between now and the weekend:
- Wednesday: ADP private payrolls – often a decent preview of Friday’s official jobs report.
- Thursday: Weekly jobless claims – continuing claims have been creeping higher, and that trend matters.
- Friday: The delayed September PCE inflation reading – the Fed’s preferred gauge.
Any of these coming in softer than expected will probably push that 87% probability closer to 100%. Hot numbers, on the other hand, could knock it right back down.
In my experience, December FOMC meetings have a way of surprising people precisely because everyone thinks they’ve already priced the obvious outcome.
Monday’s Manufacturing Miss Set the Tone
Let’s not forget the ISM manufacturing index that landed yesterday. Coming in below 50 and under expectations, it reminded everyone that not every corner of the economy is firing on all cylinders.
Manufacturing might only be about 11% of GDP these days, but when the index contracts it still grabs headlines—and more importantly, it grabs the Fed’s attention.
What Flat Yields Are Really Telling Us
When yields refuse to budge despite a huge swing in rate-cut odds, it usually means the market has already done most of its homework. In other words, the 10-year trading around 4.10% already reflects a high likelihood of one more cut.
If that probability keeps climbing and yields stay glued here, it would actually be a sign of confidence rather than indecision. The bond market is saying: “Yeah, we think this cut is coming, and we’re comfortable with these levels.”
The Bigger Picture for Fixed-Income Investors
Steady yields in the low-4% area aren’t exactly screaming opportunity, but they’re a far cry from the 5%+ levels we saw not that long ago. For anyone sitting on cash waiting for “higher for longer” to really bite, the window might be closing.
I still meet investors who swear they’ll only lock in duration once the 10-year hits 4.50% or 5%. My quiet suspicion is many of them will keep moving the goalposts as yields refuse to cooperate.
That’s human nature, of course. We all love the idea of perfect timing until the market refuses to give us the setup we imagined.
Looking Past December
Even if the Fed does cut in two weeks, the conversation quickly shifts to 2026 pacing. Current pricing suggests maybe two or three additional cuts next year—hardly the aggressive easing cycle some were fearing (or hoping for) earlier this year.
In plain English: we appear to be settling into a “lower but not low” rate environment. Four percent handles on the 10-year could be the new normal for a while.
Final Thoughts Before the Data Deluge
Tuesday’s calm in the Treasury market feels a bit like the quiet before a storm—or maybe the calm after the market has already made its peace with what’s coming.
Either way, the next few days will be fascinating. One soft payroll print or a tame inflation reading and that December cut could be locked in faster than anyone expects.
And if the data surprises to the high side? Well, yields might finally wake up from their nap—and not in the direction most bond bulls want to see.
For now, though, the Treasury market is doing what it does best: waiting patiently while the rest of us try to read the tea leaves.
Whatever happens, one thing feels certain—this December FOMC meeting won’t be boring.
