Treasury yields climbed to the highest in more than two months, following losses in most global government-bond markets, ahead of a Federal Reserve interest-rate decision that may alter expectations for monetary policy in 2026.
US yields rose from 2 to 3 basis points across the curve, with intermediate maturities proving the weakest. The market trimmed losses and a sale of $58 billion of three-year notes at 1 p.m. New York time, arrived at a lower than forecast yield, a sign of better than anticipated demand. Auctions of $39 billion 10-years and $22 billion 30-years are set for Tuesday and Thursday, respectively.
The Treasury shifted this week's auction schedule to accommodate the Fed's two-day meeting, which concludes with Wednesday afternoon's announcement. Traders see a roughly 90% chance that the central bank will deliver a third straight quarter-point reduction, to a range of 3.5% to 3.75%. Market participants will focus on officials' outlook for 2026 — through their so-called dot plot — with inflation remaining stubbornly elevated.
"The expected Fed rate cut this week is expected to come with a hawkish tone and a potentially extended pause next year," said John Canavan, lead analyst at Oxford Economics. "A strong signal that the Fed is prepared for an extended pause could leave investors disappointed," with markets pricing in greater than 90% odds of another cut by April.
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The benchmark 10-year Treasury yield, which helps determine borrowing costs for home loans and corporate borrowing, rose 4 basis points to 4.17% Monday. The 4.2% level in the maturity has capped rates since September. The 30-year yield was around 4.82%, near the highest since September.
In recent weeks, a swap-market proxy for where the Fed ends its current easing cycle - the so-called terminal rate - has jumped from under 3% toward 3.2%, its highest reading since July.
Swaps traders trimmed expectations for Fed cuts in 2026 relative to last week. Assuming a cut on Wednesday, they now see two additional quarter-point moves by the end of next year, some 5 basis points lower than on Friday.
The Fed is "going to cut and it's going to frame that cut as ongoing risk management," said Roger Hallam, global head of rates at Vanguard. He said the Fed likely stops easing closer to 3.5% than 3%.
Next year, the firm expect the macro environment to be one of growth, while "inflation is still above target," he said. "Therefore, we'll not see that continuation of rates down towards 3%."
Amid worries over the prospect that the Fed downplays the inflation risk and eases aggressively next year under a new chair, longer-dated yields have risen toward multimonth highs in a sign that investors are demanding more of a risk premium. A New York Fed model of term premium, a measure of that perceived risk, is around 0.7%, back at levels seen in early September.
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President Donald Trump has said he's close to naming his choice to replace Chair Jerome Powell, whose term ends next year, and White House National Economic Council Director Kevin Hassett has emerged as the frontrunner. Speaking Monday on CNBC, Hassett
"Yields at the 2,10, and 30-year tenors have largely round-tripped to levels seen when the Fed was expected to be on pause," Bob Elliott, chief investment officer at Unlimited, wrote in a note. "The result is these elevated easing expectations have yielded a counterintuitive result - higher expectations of easing pushing yields higher, not lower."
