Key takeaways
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- US Treasuries are set for their first weekly gain since November.
- Core inflation slowed to its weakest annual pace since early 2021.
- The unemployment rate rose to a four-year high, reinforcing a dovish Fed outlook.
- Markets are pricing at least two rate cuts in 2026, with a meaningful chance of a third.
What Happened?
US government bonds rallied after economic data showed cooling inflation and a softer labor market. The 10-year Treasury yield is on track for a roughly four-basis-point weekly decline, while the two-year yield has fallen more sharply as investors reassess the Federal Reserve’s policy path.
Money markets now imply two quarter-point rate cuts next year, with about a 40% probability of a third. The yield gap between two- and 10-year Treasuries widened to its largest level since January 2022, reflecting stronger expectations for near-term easing.
Why It Matters?
The data reinforces the view that restrictive policy is gaining traction. Slower inflation and rising unemployment give the Fed more room to cut without reigniting price pressures. The rally also signals that investors are increasingly confident that the next phase of policy is easing, not tightening, which has implications across equities, credit and the dollar.
Notably, bond-market volatility has dropped to its lowest level since 2021, suggesting investors are growing comfortable with the rate-cut narrative heading into the new year.
What’s Next?
With no major US data releases until January, markets will focus on Fed communication and technical factors such as year-end liquidity and Treasury auctions. Holiday-related disruptions could add short-term uncertainty, but unless inflation or labor data reaccelerate meaningfully, expectations for multiple rate cuts in 2026 are likely to remain intact.
