Wall Street Faces Fed Uncertainty as Bill Gross Dumps Treasuries

Wall Street wrapped up October on an upbeat note as optimism around artificial intelligence, robust corporate earnings, and looser financial conditions powered stocks to their sixth straight month of gains. Credit markets also extended their winning streak, marking a third consecutive monthly rise.

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Yet amid this renewed risk appetite, the Federal Reserve delivered a more cautious and complex message. In a rare moment of bluntness, Chair Jerome Powell reminded markets that a December rate cut is “far from” guaranteed. For the first time in six years, policymakers were split with some pushing for a deeper cut while others preferred to hold steady.

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This divergence highlighted a familiar challenge for the Fed: how to balance a cooling labor market against persistent inflation pressures. For investors, it also reintroduced an element of uncertainty that had largely been absent throughout 2025.

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Markets responded swiftly. Treasury yields recorded one of their sharpest Fed-day jumps since 2022, lifting the dollar alongside them. Interest-rate swaps now reflect about even odds of a December rate cut down from nearly 90% before Powell’s remarks.

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For most of this year, investors had the luxury of assuming a steady and predictable Fed path. That stability made bonds an unusually versatile investment offering both protection and solid returns. Traditional 60/40 portfolios, risk-parity trades, and credit-heavy strategies thrived in that environment of declining yields and subdued volatility.

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But Powell’s comments hinted that the road ahead could look very different. A less unified Fed could mean greater uncertainty around policy, and a more complex balancing act between inflation and growth. In this scenario, the traditional bond playbook may no longer apply. Trades closely tied to short-term Fed expectations have become pricey, while longer-term debt more sensitive to economic surprises could suffer if growth reaccelerates.

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Former “bond king” Bill Gross is positioning for that possibility. He’s shorting Treasury futures, betting that massive federal deficits and heavy debt issuance will keep yields elevated. Others are adjusting their portfolios toward mid-duration bonds, which offer a middle ground between volatility and yield risk.

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“When traffic’s heavy, you don’t stand in the road you move to the island in the middle,” said veteran investor Dan Fuss of Loomis Sayles, describing his cautious stance.

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Powell’s acknowledgment of “strongly differing views” within the Fed was underscored later in the week as three regional presidents Lorie Logan of Dallas, Beth Hammack of Cleveland, and Jeff Schmid of Kansas City publicly stated they would have preferred no change in rates. Analysts expect more internal disagreements if the incoming data continues to show a mixed economic picture.

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“If the numbers stay uneven, you’ll see more dissent,” said Bob Michele, global head of fixed income, currency, and commodities at JPMorgan Asset Management. “Powell’s losing some control over the Fed’s direction he’s entering the lame-duck stage of his term.”

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Despite the volatility in bonds, equities held firm. The Nasdaq 100 climbed about 2% for the week, while Bloomberg’s dollar index advanced nearly 1% since Powell’s press conference finishing October with just its second monthly gain of the year. Options markets now show growing confidence in the dollar’s short-term outlook.

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Stubbornly high U.S. yields are bolstering the dollar’s appeal for global investors seeking better returns on cash holdings. For currency traders, this environment favors buying the greenback, particularly against the yen. The Bank of Japan, led by Governor Kazuo Ueda, kept rates unchanged this week and signaled that any future hikes could be slow to materialize.

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“If investors believe the Fed won’t cut as quickly or as deeply, that supports the dollar,” explained Jim Caron, chief investment officer at Morgan Stanley Investment Management. Caron noted that Morgan Stanley’s currency team previously bearish on the dollar turned neutral after the Fed’s October meeting and recommended closing short positions against both the euro and the yen.

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Analysts at TS Lombard, including Daniel Von Ahlen and Andrea Cicione, are also betting on policy divergence between the U.S. and Japan. Their trade of choice: shorting U.S. December SOFR futures against Japanese equivalents, effectively wagering that American short-term rates will stay higher through year-end.

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Meanwhile, Gross the 80-year-old co-founder of Pimco remains wary of U.S. debt markets. He has repeatedly warned of growing excesses in the financial system and now argues that swelling deficits and a potentially weaker dollar keep him bearish on Treasuries.

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“My trade? I’m selling 10-year futures,” Gross wrote in an email. “There’s just too much supply, even if the economy slows to 1% or 2%.”

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In short, while Wall Street’s rally rolls on, Powell’s caution and the Fed’s emerging divisions have reintroduced uncertainty into markets that had grown comfortable betting on rate cuts. Investors now face a more delicate balancing act between chasing returns and preparing for a less predictable Fed.

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