On Wednesday, the central bank announced another quarter-point rate drop. Why one chief investment officer said that choice “could look reckless” in January.
The Federal Reserve’s quarter-point interest rate drop seemed to be welcomed by bond traders.
For the majority of Thursday’s session, U.S. government debt increased as bond dealers seemed to support the Federal Reserve’s announcement yesterday that it will drop interest rates once again. However, other investors believe that caution is warranted.
For the majority of the day, Treasury yields were somewhat lower across the curve due to Thursday’s bond market rise, from rates on the 1-month T-bill BX:TMUBMUSD01M to the 30-year bond BX:TMUBMUSD30Y. The benchmark 10-year yield, BX:TMUBMUSD10Y, and the policy-sensitive 2-year rate, BX:TMUBMUSD02Y, both dropped a few basis points to close at 4.14% and 3.53%, respectively. In the meantime, indicators of the state of the finance market indicated that pressure was lessening.
On Wednesday, the Fed announced measures to increase liquidity in short-term funding markets and delivered its third interest-rate decrease for 2025. According to CME Group data, futures markets were pricing in two rate cuts as the most likely scenario, but senior officials had factored in just one rate decrease for the upcoming year in their projections.
The Fed made its decision on Wednesday without the benefit of important economic data for October and November because of the U.S. government shutdown that ended on November 12, even though policymakers stated in a prepared statement that they saw risks to both the labor-market and inflation sides of the central bank’s dual mandate.
Furthermore, experts anticipate that the full effects of tax cuts under President Trump’s One Big Beautiful Bill Act on economic activity and spending will become apparent in 2026. Treasury yields are expected to climb once further if inflation begins to push higher as a result.
Andrew Wells, chief investment officer at SanJac Alpha, a Houston-based investment management company that specializes in actively managed fixed-income exchange-traded funds, said that although Fed officials claim to be “data-dependent,” they simply lowered rates without knowing the inflation readings from October or November (because of the government shutdown).
“This cut could look reckless by January,” Wells noted in an email to MarketWatch, if unemployment improves and the missing November inflation data indicates an increase.
In contrast to October and September, when traders sold off the benchmark 10-year Treasury note on the day before and the day following the central bank’s decisions to cut rates by a quarter-point, the bond market’s response to the Fed’s policy pronouncements on Wednesday is different. The yield on the 10-year Treasury increased by 7.9 basis points on September 17–18 and by 11.2 basis points on October 29–30.
Following the central bank’s decision to once more lower its fed-funds rate target by a quarter-point increment, the 10-year yield dropped 4.7 basis points on Wednesday and Thursday, to between 3.5% and 3.75%. In addition to predicting only one rate decrease in 2026, the Fed’s midweek policy announcement also contained a proposal to buy roughly $40 billion worth of Treasury bills beginning on Friday in order to increase liquidity in the short-term funding markets.
“The Fed cutting rates while simultaneously indicating its intent to buy $40 billion of T-bills to buoy liquidity in the front end of the bond market could indicate that quantitative easing is on the horizon,” Wells of SanJac Alpha said. “This first purchase announcement should ease concerns about liquidity in the front end of the Treasury curve, and we remain bullish on bonds in the [2- to 5-year] tenors.”
