Bond Market Update

Market Gets Its Cut

• U.S. Treasuries climbed on Wednesday, snapping a four-day skid in the 10-yr note and shorter tenors. Treasuries were on track for an extension of their recent losses at the start of the cash session with yields on the 10-yr note and shorter tenors opening at fresh highs for the month. However, a rebound began taking shape immediately with some help from the Q3 Employment Cost Index (0.8%; Briefing.com consensus 0.9%), which showed a smaller-than-expected increase in compensation costs. The rebound continued as the day went on, but the pace of the buying slowed considerably leading into the afternoon release of the FOMC Statement. On the surface, that Statement went as expected with the Fed calling for a 25-basis point rate cut. However, the central bank also announced that it will begin purchasing Treasury bills on Friday. It will start buying $40 bln worth of bills over the next month, followed by updated totals for the following months on or around the ninth day of each new month. The FOMC also released its Summary of Economic Projections, showing an increase in the 2026 GDP growth forecast to a range of 2.1% to 2.5% from 1.7% to 2.1%. The 2026 PCE forecast was narrowed to a range of 2.3% to 2.5% from 2.4% to 2.7%. The fed funds rate range forecast for 2026 sits between 2.9% and 3.6%, unchanged from the September projection. Treasuries of most tenors held their ground in immediate reaction to the Statement while the long bond began pulling back from its high and was eventually joined by some light weakness in other tenors after Fed Chairman Powell said that the policy rate is now believed to be in a neutral range, suggesting limited room for additional easing. Crude oil recorded a modest gain while the U.S. Dollar Index fell 0.3% to 98.95.
• Yield Check:
  • 2-yr: -4 bps to 3.57%
  • 3-yr: -4 bps to 3.61%
  • 5-yr: -2 bps to 3.76%
  • 10-yr: -2 bps to 4.16%
  • 30-yr: -1 bp to 4.80%

• News:
  • Punchbowl reported that some House GOP members are seeking a two-year extension of enhanced ACA subsidies.
  • The International Monetary Fund raised its 2025 growth forecast for China to 5.0% from 4.8% while the outlook for 2026 was increased to 4.5% from 4.2%.
  • Taiwan's exports jumped 56% yr/yr in November, representing the fastest increase in 15 years.
  • U.S. Trade Representative Greer said that the trade deal with Indonesia is at risk due to Indonesia backtracking on multiple commitments.
  • The Bank of France expects Q4 GDP to decelerate to 0.2% from 0.5% in Q3.
  • Germany's Chemical Industry Association saw a 1% drop in 2025 revenue with little hope for improvement in 2026.
  • China's November CPI was down 0.1% m/m (expected 0.2%; last 0.2%) but up 0.7% yr/yr, as expected (last 0.2%). November PPI was down 2.2% yr/yr (expected -2.0%; last -2.1%).
  • Japan's November PPI was up 0.3% m/m, as expected (last 0.5%), rising 2.7% yr/yr, as expected (last 2.7%). December Reuters Tankan Index fell to 10 from 17.
  • South Korea's November Unemployment Rate rose to 2.7% from 2.6%.
  • New Zealand's October Visitor Arrivals rose 0.6% m/m (last 2.9%) and External Migration and Visitors increased 9.4% yr/yr (last 9.6%).
  • Italy's October Industrial Production fell 1.0% m/m (expected -0.3%; last 2.7%), dropping 0.3% yr/yr (expected 0.2%; last 1.4%).
• Today's Data:
  • Compensation costs for civilian workers increased 0.8% (Briefing.com consensus: 0.9%), seasonally adjusted, for the 3-month period ending in September 2025. That was a moderation from the 0.9% increase registered in the second quarter.
    • The key takeaway from the report is that it was an inflation-friendly report, evidenced by wages and salaries decelerating on a year-over-year basis for civilian workers (3.5% vs 3.9% a year ago), private industry (3.6% vs 3.8% a year ago), and state and local government workers (3.5% vs 4.6% a year ago).
  • The U.S. Treasury reported a $173.0 bln deficit for November (Briefing.com consensus -$223.4 bln) after a deficit of $284.0 bln in October.
  • The weekly MBA Mortgage Index rose 4.8% to follow last week's 1.4% decrease. The Refinance Index jumped 14.3% while the Purchase Index was down 2.4%.
  • Weekly crude oil inventories decreased by 1.82 mln barrels after increasing by 574,000 barrels a week ago.
• Commodities:
  • WTI crude: +0.5% to $58.53/bbl
  • Gold: -0.3% to $4224.70/ozt
  • Copper: +0.6% to $5.35/lb
• Currencies:
  • EUR/USD: +0.6% to 1.1692
  • GBP/USD: +0.6% to 1.3378
  • USD/CNH: UNCH at 7.0586
  • USD/JPY: -0.6% to 155.93
• The Day Ahead:
  • 8:30 ET: Weekly Initial Claims (prior 191,000), Continuing Claims (prior 1.939 mln), and September Trade Balance (Briefing.com consensus -$61.7 bln; prior -$59.6 bln)
  • 10:00 ET: September Wholesale Inventories (Briefing.com consensus -0.2%; prior NA)
  • 10:30 ET: Weekly natural gas inventories (prior -12 bcf)
• Treasury Auctions:
  • 13:00 ET: $22 bln 30-yr Treasury bond reopening results

FOMC Reaction Muted

• U.S. Treasuries of most tenors continue trading near their recent levels, having shown a limited immediate reaction to the FOMC Statement. The long bond has bucked the trend, facing some relative weakness. The Statement was not surprising on the surface, as the Fed announced the long-awaited 25-basis point rate cut. However, the central bank also announced that it will begin purchasing Treasury bills on Friday. It plans to buy $40 bln worth of bills over the next month, followed by updated totals for the following months on or around the ninth day of each new month. Besides the FOMC Statement, the FOMC released its Summary of Economic Projections, showing an increase in the 2026 GDP growth forecast to a range of 2.1% to 2.5% from 1.7% to 2.1%. The 2026 PCE forecast was narrowed to a range of 2.3% to 2.5% from 2.4% to 2.7%. The 2026 fed funds rate range was forecast between 2.9% and 3.6%, unchanged from the September projection.
• Yield Check:
  • 2-yr: -4 bps to 3.57%
  • 3-yr: -3 bps to 3.62%
  • 5-yr: -2 bps to 3.76%
  • 10-yr: -2 bps to 4.17%
  • 30-yr: -1 bp to 4.80%

FOMC Ahead

• U.S. Treasuries trade just below their session highs that were notched about an hour ago as the market awaits the release of the FOMC Statement atop the hour. The market sits on highs leading into the Statement, but today's advance comes after four days of selling in most tenors that has driven the 5-yr yield to its highest level since late August while the 10-yr yield briefly climbed above its September high at today's cash start. The market has little doubt that a rate cut will be announced this afternoon, but it is still unclear if Fed Chairman Powell will maintain his hawkish tone when he speaks to the press at 14:30 ET.
• Yield Check:
  • 2-yr: -2 bps to 3.59%
  • 3-yr: -2 bps to 3.63%
  • 5-yr: -2 bps to 3.76%
  • 10-yr: -3 bps to 4.16%
  • 30-yr: -3 bps to 4.78%

Opening Losses Reversed

• U.S. Treasuries trade on their highs after a steady rise off their opening levels. The trading day began with losses across the curve that briefly lifted yields on 10s and shorter tenors to fresh highs for the month before a steady bounce that has continued through the first two hours of action. The market received the Q3 Employment Cost Index (actual 0.8%; Briefing.com consensus 0.9%) this morning, which showed a smaller than expected increase. Equities are off to a flat start with the S&P 500 hovering just below its flat line as the market awaits today's FOMC Statement at 14:00 ET.
• Yield Check:
  • 2-yr: -1 bp to 3.60%
  • 3-yr: -1 bp to 3.64%
  • 5-yr: -1 bp to 3.77%
  • 10-yr: -2 bps to 4.17%
  • 30-yr: -2 bps to 4.79%

Data Recon

• Compensation costs for civilian workers increased 0.8% (Briefing.com consensus: 0.9%), seasonally adjusted, for the 3-month period ending in September 2025. That was a moderation from the 0.9% increase registered in the second quarter.
  • The key takeaway from the report is that it was an inflation-friendly report, evidenced by wages and salaries decelerating on a year-over-year basis for civilian workers (3.5% vs 3.9% a year ago), private industry (3.6% vs 3.8% a year ago), and state and local government workers (3.5% vs 4.6% a year ago).
• Yield Check:
  • 2-yr: +1 bp to 3.62%
  • 3-yr: +1 bp to 3.66%
  • 5-yr: +2 bps to 3.80%
  • 10-yr: +1 bp to 4.20%
  • 30-yr: +1 bp to 4.82%