Duration Dashboard: Treasury Yields Rise Ahead of December FOMC

The week's yield curve dynamics reflected a market reconciling conflicting signals: weak private payroll data arguing for easier policy versus resilient jobless claims suggesting no imminent labor market deterioration. The result was a bear steepening pattern where long-end yields rose more than short-end rates, consistent with expectations that the Fed will cut in December but may slow the pace of easing into 2026. The 10-year yield's position at the 65th percentile indicates rates remain in the middle of their recent range, neither stretched nor compressed.

Credit Pulse: Spreads Tighten Ahead of December Fed Rate Cut

Credit markets continued their compression trend, with high yield spreads tightening 12bp to 244bp—placing them at just the 5th percentile of their 5-year range. Investment grade spreads narrowed 3bp to 74bp, also in historically tight territory at the 22nd percentile. The VIX declined nearly a full point to 15.41, its lowest level since September 2025, reflecting what some market commentators have termed "super calm" conditions ahead of the December FOMC meeting.

Federal Reserve Policy Outlook: December Rate Cut Expectations Near Certain

Market pricing for a 25bp rate cut at the December 9-10 FOMC meeting stood at 87% by week's end, up from approximately 50% in early November. Governor Christopher Waller emerged as the most influential voice supporting continued easing, describing another cut as a matter of risk management given the labor market's mixed signals. The federal funds rate currently stands at 4.50-4.75% following cuts in September and November.

The key development for fixed income investors is the emerging consensus that the December cut may be followed by an extended pause. Bank of America's forecast of only two additional cuts through 2026 reflects growing belief that the Fed will want to assess the cumulative effect of its easing cycle before proceeding further. Chair Powell had previously cautioned that a December cut was "not a foregone conclusion," and some Committee members prefer a pause to evaluate incoming data. The updated Summary of Economic Projections and dot plot will provide critical guidance on the path forward.

Week Ahead: FOMC Decision Takes Center Stage

• FOMC Meeting (December 9-10): The week's primary event, with markets pricing 87% probability of a 25bp cut. Updated economic projections and Powell's press conference will be closely watched for guidance on the 2026 rate path.
• CPI Inflation (December 11): November consumer price data arrives day after the Fed decision. Core CPI consensus stands around 0.3% monthly, with any upside surprise potentially validating a slower easing pace into 2026.
• November Employment Report (December 16): The Bureau of Labor Statistics jobs report has been delayed from its usual first-Friday release due to the recent government shutdown. This means the Fed will make its December decision without the official November employment data.
• Retail Sales (December 13): November retail data will provide an early read on holiday shopping activity and consumer spending momentum entering year-end.
• PPI Inflation (December 12): Producer price data offers another inflation checkpoint, with pipeline pressures remaining a focus for Fed policy calibration.

US Economic Positioning and Global Context

The US economy continues to demonstrate resilience relative to global peers, though the week's labor data suggested the margin of outperformance may be narrowing. The dollar index declined below 99 to one-month lows, reflecting both rate cut expectations and broader reassessment of relative growth trajectories. Reports that the administration is considering withdrawal from the USMCA trade agreement added a layer of policy uncertainty, though tariff revenues have been running approximately $100 billion below initial projections due to high USMCA utilization rates.

Global central bank divergence: The Bank of Japan emerged as a notable hawk, with Governor Ueda indicating the BOJ is weighing the pros and cons of raising rates at its December 18-19 meeting. Bloomberg reported officials are ready to raise rates to 0.75%, which would be the highest level since 1995. This potential policy divergence from the easing Fed could influence dollar-yen dynamics and global fixed income flows. European political uncertainty also remained elevated following France's government collapse earlier in the week, though market impact was limited. The calm volatility environment—both VIX at 15.41 and the MOVE index at multi-year lows—suggests investors have grown comfortable with current positioning, a condition that historically precedes regime shifts.