Duration & Credit Pulse
Executive Summary
Bottom Line: Federal Reserve December rate cut expectations drove fixed income markets during a holiday-shortened week, with dovish commentary from Fed Governors Waller and Williams lifting cut probability to 82% from 35% earlier in the period. The 10-year Treasury yield declined 5 basis points to 4.01%, while credit spreads compressed meaningfully—high yield tightening 19 basis points to 265 bp despite consumer confidence falling to a 7-month low at 88.7. The juxtaposition of resilient labor markets (jobless claims at 216,000) against softening sentiment indicators creates an uncertain backdrop heading into the December 17-18 FOMC meeting.
Duration Dashboard: Treasury Yields and Fed Policy Outlook
| Maturity | Nov 21, 2025 | Nov 28, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| 2‑Year | 3.51% | 3.49% | −2 bp | 36th %ile (middle range) |
| 5‑Year | 3.62% | 3.60% | −2 bp | 42nd %ile (middle range) |
| 10‑Year | 4.07% | 4.01% | −5 bp | 58th %ile (middle range) |
| 30‑Year | 4.71% | 4.66% | −5 bp | 81st %ile (elevated) |
Bull Flattening as December Rate Cut Odds Rise
Curve Analysis: Treasury yields declined across the curve in a modest bull flattening pattern, with the 10-year and 30-year each falling 5 basis points while the front end edged down just 2 basis points. The 2s10s spread narrowed slightly to +52 basis points, maintaining the positively sloped curve dynamic that has persisted since the September un-inversion. The long end remains elevated at the 81st percentile of its 5-year range, reflecting persistent term premium despite the Fed's dovish tilt—a dynamic that bears monitoring as December rate cut expectations crystallize.
The Federal Reserve December rate cut narrative dominated fixed income markets during the Thanksgiving-shortened trading week. Dovish commentary from Fed Governors Christopher Waller and John Williams drove a meaningful shift in market expectations, with CME FedWatch probability of a December cut rising to 82% from approximately 35% following the stronger-than-expected September employment data released November 20. The 10-year yield declined 5 basis points to close at 4.01%, breaching the psychologically important 4% threshold intraday before settling just above it.
Credit Pulse: Spreads Tighten Amid Rate Cut Optimism
| Metric | Nov 21, 2025 | Nov 28, 2025 | Weekly Δ | 5-Year Percentile |
|---|---|---|---|---|
| IG OAS | 80 bp | 76 bp | −4 bp | 29th %ile (tight) |
| HY OAS | 284 bp | 265 bp | −19 bp | 15th %ile (very tight) |
| VIX Index | 23.43 | 16.35 | −7.08 | 32nd %ile (middle range) |
Credit spreads compressed meaningfully during the holiday week, with high yield tightening 19 basis points to 265 bp—now sitting at just the 15th percentile of its 5-year range. Investment grade spreads followed suit, narrowing 4 basis points to 76 bp (29th percentile). The VIX declined 7.08 points to 16.35, returning to the middle of its historical range after elevated readings the prior week. This risk-on dynamic reflects market confidence in the Fed's ability to engineer a soft landing, though the magnitude of spread compression warrants attention given weakening consumer sentiment data.
US Macroeconomic Assessment – Data Gaps and Consumer Confidence Weakness
The week of November 23-28 presented a mixed economic picture complicated by lingering data gaps from the 43-day government shutdown that ended November 12. While labor market indicators remained resilient—initial jobless claims fell to 216,000, the lowest since early October—consumer confidence weakened notably, creating a divergence that complicates the Federal Reserve's policy calculus heading into its December meeting.
Consumer sentiment weakens notably: The Conference Board's Consumer Confidence Index fell to 88.7 in November, missing consensus expectations of 93.2 and representing the largest monthly decline since April 2025. The Expectations Index dropped to 63.2—remaining below the 80 threshold that historically signals recession for the tenth consecutive month. Write-in responses cited concerns about inflation, tariffs, and lingering shutdown effects. The University of Michigan's final November reading of 51.0 marked the second-lowest on record, with the Current Conditions index reaching a historical low at 51.1.
Labor market resilience persists: Initial jobless claims for the week declined to 216,000, below the 220,000 consensus and representing the lowest reading since early October. Continuing claims remained contained, suggesting that while hiring may have slowed, layoff activity has not accelerated. The September employment data released November 20 showed 119,000 jobs added—above the 50,000 consensus—providing additional support for the soft landing narrative despite the consumer confidence weakness.
Business investment holds steady: September durable goods orders rose 0.5% month-over-month, exceeding the 0.3% consensus estimate. Core capital goods orders (nondefense ex-aircraft) increased 0.9%, suggesting business investment remains intact despite policy uncertainty. However, the Chicago PMI fell to 36.3—its 24th consecutive month in contraction territory and 8 points below consensus of 44.3—highlighting continued manufacturing sector softness in the industrial heartland.
Federal Reserve Policy Outlook: December Cut Increasingly Likely
The Federal Reserve's December 17-18 meeting represents the key event for year-end fixed income positioning. Market pricing shifted materially during the week following dovish commentary from key Fed officials, with CME FedWatch now showing 82% probability of a 25 basis point cut—up from approximately 35% following the September jobs report release. The October FOMC minutes, released November 19, revealed a committee at an inflection point, with "many participants" indicating they "could have also supported maintaining the level of the target range."
Governor Waller's remarks proved particularly influential, with his characterization of inflation as "not a big problem with the labor market weak" representing a notable departure from prior caution. He estimated tariffs are contributing approximately "half to three-quarters of a percentage point" to current inflation readings—a framing that suggests the Fed may be willing to look through tariff-related price pressures. NY Fed President Williams reinforced the dovish case, noting "room for further adjustment in the near term." However, Dallas Fed President Logan's preference for holding rates steady in October and her statement that she would "find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected" underscores remaining hawkish resistance.
The committee unanimously agreed to end quantitative tightening on December 1, reducing the balance sheet to approximately $6.6 trillion after $2.3 trillion of reductions since June 2022. This technical adjustment removes one source of policy uncertainty, allowing markets to focus on the rate decision itself.
Week Ahead: Employment Data and Pre-FOMC Positioning
- November Employment Report (December 5): Consensus expects approximately 175,000 jobs added with unemployment holding at 4.1%. This represents the final major data release before the December 17-18 FOMC meeting and will heavily influence the rate cut decision.
- PCE Inflation (December 5): The Fed's preferred inflation measure—delayed from the shutdown—will provide critical context for December policy. Core PCE expected at 2.8% year-over-year, with any upside surprise potentially challenging the dovish narrative.
- ISM Services PMI (December 4): November services activity data will gauge whether consumer spending softness is translating into broader economic weakness. October reading of 54.9 showed continued expansion.
- JOLTS Job Openings (December 3): October job openings data will reveal whether labor demand continues its gradual cooling or has stabilized at current levels.
- Fed Blackout Period Begins (December 7): Final opportunity for Fed communications before the December meeting. Any last-minute remarks could significantly impact positioning.
US Economic Positioning and Global Context
The United States continues to outperform major developed market peers, with the Atlanta Fed's GDPNow model estimating Q3 growth at 3.9% SAAR despite the shutdown-related cancellation of the official advance estimate. This growth differential supports continued dollar strength, though the DXY slipped below 100 during the week as softer US data boosted December rate cut expectations. The combination of Fed easing expectations and relative growth outperformance creates a complex backdrop for Treasury demand from foreign investors.
Global central bank divergence narrows: The ECB is expected to hold rates steady through 2026 following stabilization in eurozone inflation, while the Bank of Japan faces mounting pressure to hike again following Tokyo core CPI of 2.8%—above expectations. China continues comprehensive stimulus efforts amid property sector stress. For US fixed income investors, the key implication is that policy divergence that supported dollar strength through much of 2025 may be narrowing, potentially influencing foreign demand for Treasuries at current yield levels. Geopolitical developments provided modest tailwinds, with Ukraine peace negotiations advancing and trade tensions with China showing signs of stabilization following the Trump-Xi call.
Frequently Asked Questions
What is the probability of a Federal Reserve rate cut in December 2025?
Market pricing via CME FedWatch indicates an 82% probability of a 25 basis point rate cut at the December 17-18 FOMC meeting, up substantially from approximately 35% earlier in November. Dovish commentary from Fed Governors Waller and Williams drove this shift, though hawkish resistance from regional Fed presidents creates some uncertainty around the outcome.
Why did Treasury yields decline during the week of November 28?
Treasury yields fell across the curve—with the 10-year declining 5 basis points to 4.01%—primarily due to increased expectations for Federal Reserve rate cuts following dovish commentary from key Fed officials. Soft consumer confidence data (88.7 versus 93.2 expected) reinforced the case for monetary policy easing, supporting bond prices and pushing yields lower.
How tight are credit spreads compared to historical levels?
Credit spreads remain at historically tight levels. High yield OAS at 265 basis points sits at the 15th percentile of its 5-year range—meaning spreads have been wider 85% of the time over the past five years. Investment grade spreads at 76 basis points are at the 29th percentile. These tight levels reflect optimism about a soft landing but offer limited cushion should economic conditions weaken.
What economic data releases are most important before the December FOMC meeting?
The November employment report (December 5) and PCE inflation data (December 5) represent the most market-moving releases before the December 17-18 FOMC meeting. Strong job growth above 200,000 or core PCE inflation surprising to the upside could challenge the 82% market probability of a December rate cut, while weak readings would reinforce the easing case.
Key Articles of the Week
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Fed's Waller Advocates for December Rate Cut, Discusses Fed Chair RoleYahoo Finance / ReutersNovember 25, 2025Read Article
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New York Fed President Williams Sees Room for 'Further Adjustment' to RatesCNBCNovember 21, 2025Read Article
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US Consumer Confidence Fell Sharply in NovemberThe Conference Board / PR NewswireNovember 25, 2025Read Article
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US Durable Goods Orders Rise 0.5% in September vs. 0.3% ExpectedFXStreetNovember 26, 2025Read Article
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A December Interest Rate Cut Looks Likely—AgainMorningstarNovember 27, 2025Read Article
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How Has Treasury Market Liquidity Fared in 2025?Federal Reserve Bank of New York - Liberty Street EconomicsNovember 2025Read Article
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Daily Treasury Rates - November 2025U.S. Department of the TreasuryNovember 28, 2025Read Article
