- US interest futures remain volatile after the Fed’s rate cut decision.
- Long-term yields rose despite the Fed cut as the odds of December easing faded amid Powell’s cautious tone.
- Short-term contracts like Fed funds and SOFR remain under pressure as markets brace for cautiousness
This week, US interest futures experienced volatility as traders reacted to Cautious Fed guidance and rising long-term yields. The Fed reduced its benchmark rate by 25 bps to 3.75 – 4.00%, which was largely priced in by the markets.
However, Fed Chair Powell warned that further cuts are not guaranteed. This eased the expectations of a December rate cut from 85% to near 70%, which led to immediate adjustment across the yield curve.
The long-term yields surged despite the rate cut, with 10-year yields rising to 4.11%. The gains reflect the lingering inflation risks, higher term premiums, and growing odds of the Fed pausing the rate cuts instead of beginning a sustained easing cycle. This yield rise pressured the front-month 10-year note contract as bond prices declined.
Short-term interest futures like Fed funds and SOFR contracts saw record volumes as market participants adjusted to the policy outlook. The Fed’s cautious signal came when the data visibility was already clouded amid the government shutdown, forcing policymakers to make decisions “in the fog”, as Powell described.
With traders holding significant bets on further easing, any sign of Fed hesitation or upbeat economic data could trigger sharp unwinds in the short-term contracts.
The market participants are now looking at upcoming inflation data and labor market reports to determine whether the October rate cuts mark the end of easing or only a temporary pause.
The next FOMC meeting, scheduled for mid-December, will be crucial to shaping the monetary policy for 2026. Current pricing suggests a moderate probability of another 25-bps cut, but the odds are reducing with rising yields.
However, if inflation remains soft with a weakening labor market, the yields could retreat to 4.0%. Contrarily, stronger data could reignite the inflationary pressure and push the yields to 4.30% or higher, deepening losses for bond futures.