This week, the US Treasury market is poised to record gains, primarily driven by market risk-off demand, which has successfully offset investor doubts about whether the Federal Reserve will cut interest rates next month. The benchmark 10-year Treasury yield fell 9 basis points over the past five trading days to 4.05%, marking its largest weekly decline since mid-October. Meanwhile, the two-year Treasury yield also experienced a similar decline, recording its largest weekly drop since September.
This bond market movement occurs against a backdrop of clear divergence within the Federal Reserve regarding the path of monetary policy. Despite several officials, including Austan Goolsbee and Michael Barr, expressing caution about cutting rates again in December given that inflation remains above the policy target, market sentiment remains optimistic. A shift occurred on Friday when New York Fed President John Williams sent a dovish signal, stating that, in light of signs of weakness in the labor market, he believes the Fed still has room to cut rates “in the near term.” This statement quickly influenced market pricing.
Although market volatility increased significantly – after hitting a four-year low, the ICE BofA MOVE Index, which measures expected bond market volatility, rebounded to a two-month high on Wednesday – Treasury prices still strengthened overall. Pooja Kumra, senior rates strategist at TD Securities, pointed out that US Treasuries are benefiting from risk-off sentiment stemming from weakness in the credit market, but also emphasized that factors like reduced liquidity ahead of the Thanksgiving holiday are making market movements “choppy.”
Williams’ remarks had an immediate impact on market expectations. Investors interpreted his comments as a strong signal that the Fed might act in December, causing the market-implied probability of a December rate cut to jump sharply from around 40% before his speech to over 70%. This shift also prompted money markets to increase bets on the extent of rate cuts through 2026, further supporting the Treasury rally.
Communication from senior Fed officials, particularly messages from the “triumvirate” of the Chair, Vice Chair, and New York Fed President, is typically viewed as deliberate and reflective of the policy direction. Some analysts suggest that Williams’ statement likely had the approval of Chair Powell; otherwise, it would have been a “serious professional misstep.” This dovish signal is particularly significant at a sensitive time when opinions within the Fed are divided. That same day, two other officials – Boston Fed President Collins and Dallas Fed President Logan – expressed hesitation or even more hawkish stances regarding further rate cuts. Williams’ intervention is seen as having effectively prevented further potential selling pressure in the US stock market after Thursday’s sharp decline and successfully boosted stock index futures.
