US | Treasury market adjusts to hawkish cut, trimming easing bets

Summary

Alongside the uncertainty from the recently ended federal government shutdown, markets scaled back expectations of a deep, linear easing cycle. Uncertainty remains over the December Fed move, though a third “risk-management” cut still appears marginally more likely.

Key points

• Key points:
• Last month’s cut put rates “in that range between 3-4% where many estimates of the neutral rate live,” but the minutes showed a strong consensus that the cycle is not yet over.
• Both 2- and 10-year Treasury yields are roughly 15 bps up from their late-October lows as markets scaled back expectations of a deep, linear easing cycle.
• Markets currently see roughly 50/50 odds for December’s Fed move, but continue to price in between one and two more cuts in 2026 than projected in the latest SEP.
• High mortgage rates keep weighing on housing affordability, while narrow credit spreads highlight corporate strength, fueling the debate over the uneven impact of policy.
• Recent liquidity strains in money markets led the Fed to end its balance sheet runoff, amid signs that bank reserves have reached an “ample” (no longer “abundant”) level.

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