Treasury Yields Edge Higher as Markets Fully Price In Fed Rate Cut

Volatility in the U.S. Treasury market has dropped sharply in recent weeks, but that calm may not last long. Investors are now turning their attention to Federal Reserve Chair Jerome Powell’s upcoming press conference, which could shake up the world’s largest bond market and determine the direction of yields in the weeks ahead.

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Market participants are listening closely for Powell’s tone as divisions grow among Fed policymakers over the future path of interest rates. A cooling labor market has strengthened the argument for easing monetary policy, yet persistently elevated core inflation complicates that case.

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According to swaps pricing, traders have already fully priced in a quarter-point rate cut at Wednesday’s Fed meeting and anticipate roughly three additional cuts by mid-2025. However, Powell’s remarks could easily shift those expectations, potentially breaking the market’s recent standstill and sparking renewed movement in Treasury yields.

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If Powell delivers a hawkish message, investors may respond with fresh selling, likely pushing 10-year yields above the key 4% level and tightening financial conditions across the U.S. economy. Early Wednesday trading showed the 10-year Treasury yield steady around 3.98%, while the more policy-sensitive two-year yield held near 3.49%.

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“There’s already a lot of easing priced into the market for the next 14 months, and even a small shift in tone could lift yields by 25 to 30 basis points,” said Scott DiMaggio, head of fixed income at AllianceBernstein. “Technically, the charts are pointing toward 4.25% on the 10-year.”

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In recent sessions, yields have been largely rangebound amid limited new economic data, a lull that stems from the recent U.S. government shutdown. The ICE BofA Move Index a widely watched measure of Treasury volatility has fallen to levels not seen since the pandemic, reflecting a market in wait-and-see mode.

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“Caution is warranted in trading Treasuries right now,” said David Chao, global market strategist at Invesco Asset Management. “The labor market has cooled, which supports some degree of policy loosening, but I don’t believe rate cuts are a sure thing just yet.”

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Still, not everyone sees risks ahead. Some analysts expect Treasuries to gain momentum heading into year-end, arguing that yields near 4% present a compelling opportunity for investors seeking stability. Rising geopolitical tensions and the ongoing U.S.-China trade friction could also dampen risk appetite, pushing investors back toward safe-haven assets like government bonds.

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Further rate cuts by the Fed would likely strengthen this dynamic, providing additional tailwinds for Treasuries. “Our outlook is that growth might tick up slightly as we move into next year, which could inject some nerves into the market,” said Neil Sutherland, portfolio manager at Schroder Investment Management. “But for now, with the Fed easing policy, we believe the path of least resistance remains toward lower yields rather than higher.”

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In essence, the Treasury market sits at a crossroads. After weeks of subdued volatility and steady yields, Powell’s upcoming remarks could either validate the market’s expectations for sustained rate cuts or prompt a swift repricing if his message comes off as more cautious. For investors, that means closely monitoring not just what the Fed decides but how Powell frames the central bank’s next steps in navigating the balance between slowing growth and sticky inflation.

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As the Fed prepares to set its next course, one thing is clear: the calm in bond markets may be short-lived. A single hint of hawkishness or reassurance of dovishness from Powell could determine whether yields remain anchored or break free from their recent range, setting the tone for global markets heading into the final months of the year.

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