- Markets rapidly repriced for easing, with 10-year yields falling below 4% and rate-cut odds for December jumping to 80%.
- Fed futures and SOFR options show record positioning for cuts, even as major banks remain split on the likelihood of December easing.
- The yield curve is normalizing, but long-term yields stay elevated, with forecasts pointing to the 10-year rising toward 4.4% by the end of 2026.
US interest futures have entered the repricing phase, driven by a reversal in expectations of Fed policy. The shift accelerated this week as the 10-year Treasury yields fell slightly below 4% for the first time in a month, signaling renewed demand for the Fed to ease sooner than expected. According to JPMorgan, the net long positions in Treasuries are at 15-year highs, highlighting the scale of a positioning shift.
The catalyst behind this move has been dovish commentary from Fed officials and reports that Kevin Hasset has emerged as a leading candidate for the Fed Chair. Markets view Hasset as a rate-friendly person, prompting traders to recalibrate the policy path.
Fed benchmark-linked futures saw surging volumes, with the January contract posting record volatility in the last two weeks. The CME FedWatch tool now indicates an 80% probability of a 25-basis-point rate cut in December, up from 30% the previous week. SOFR options markets have also reflected the shift, with an increase in open interest at the 96.25 strike.
Strategists suggest that the pivot was driven not only by the dovish commentary but also by a raft of weak macroeconomic data. According to Societe Generale, Powell and his allies look supportive of a rate cut, while others see the balance of opinion appears more dovish than hawkish.
However, Morgan Stanley and JPMorgan withdrew their expectations of Fed easing in December. Meanwhile, Pimco’s Tiffany Wilding maintains that a December rate cut is likely, but the sticky inflation near 3% and downside risk in employment raise uncertainty.
The broad rates landscape continues to evolve as the yield curve has started normalizing after two years of inversion, with 2s/10s spread moving to 49 bps following the October policy cut to 3.75-4.00%. Yet long-term yields are high due to persistent price pressure, heavy Treasury issuance, and geopolitical uncertainty. BayernLB expects the 10-year yields to rise to 4.4% by the end of 2026, even if the front end declines amid Fed easing.
