Traders See Almost No Chance of Fed Cut This Month After Data

Treasuries fell and traders all but wiped out their bets that the Federal Reserve would cut interest rates later this month after the unemployment rate for December fell more than expected.

The decline in US government debt pushed yields higher across maturities by as much as three basis points on Friday after the report. Bond traders maintained an outlook for two rate cuts overall in 2026, with the first seen by mid-year.

“This keeps us on course for them to slowly continue cutting the fed funds rates as we go through this year,” Robert Tipp, chief investment strategist at PGIM Fixed Income told Bloomberg Television. “They are on the cusp of, or in the top end of, the neutral range. So they may feel like they are not having an impact on the economy, they can stand to skip a meeting.”

The jobs data provided the first clean read on the broad economy’s employment trend after a six-week US government shutdown from Oct. 1 to Nov. 12 delayed the production of labor reports for September, October and November.

The extent to which the employment data were known to some market participants before its release was unclear. In a social media post late Thursday in Washington, US President Donald Trump published an image showing the changes in US employment over the 12 months including December that were released Friday morning.

The case for additional Fed interest-rate cuts is seen resting on how the labor market performs in the coming months. While the central bank lowered its target band for short-term lending rates at its past three meetings in response to weakening labor-market conditions, some officials remain worried about inflation remaining above their target. That is seen limiting the pace of further easing.

“For us, the Fed will key off the unemployment rate more than the noise in the headline,” said John Briggs, head of US rates strategy at Natixis North America, “so this in my view is slightly bearish for US rates.”

Treasuries are fresh off a gain of more than 6% last year, their best performance since 2020, as investors eyed signs of a cooling job market. On Friday, the two-year yield was higher by three basis points to 3.52%, while the 10-year’s was 4.17%.

“The underlying breakdown in December’s job creation signals lingering weakness in the labor market, which has undercut the selloff in the bond market focused on the lower unemployment rate.”—Tatiana Darie, Macro Strategist, Markets LiveFor the full analysis, click here.

Following Friday’s report, traders are pricing in the next reduction coming in June, the month after Fed Chair Jerome Powell’s tenure ends, with another easing to follow in the fourth quarter. President Donald Trump said he knows who he wants to lead the Fed, but he’s yet to announce it. Treasury Secretary Scott Bessent said four candidates remain in the running, and he anticipates Trump will decide on a successor this month. 

Based on their expectations for December employment data, major Wall Street banks including Citigroup, JPMorgan and Morgan Stanley in the past week retained forecasts for a Fed rate cut in January.

“The drop in the unemployment rate and higher wages makes the case for the Fed to stay on hold in January,” Subadra Rajappa, head of US rates strategy at Societe Generale, said.

Traders, meanwhile, were left without clarity on the legality of President Donald Trump’s levies as the Supreme Court held off Friday from issuing a ruling. An opinion against the tariffs, which have generated hundreds of billions of dollars in revenue and eased pressure on the US budget deficit, stands to weigh on Treasuries.

Traders have in mind a slump on Nov. 5, when arguments suggested the court was skeptical that Trump had authority to impose the levies under a 1977 law giving the president special powers during emergency situations.

Removing tariffs would likely “rekindle fiscal concerns, presenting a risk of higher long-term yields and steeper curves,” JPMorgan Chase & Co. strategists including Jay Barry wrote in a note this week. Still, any impact “should be fairly limited,” given the administration’s ability to pursue other routes to restore most levies, they said.

A Bloomberg gauge of the dollar rose as much as 0.3% to a session high as the court finished its opinion release for the day without a ruling on tariffs. The court could issue more opinions in the next two weeks as the justices have return from their holiday recess.

The stage is also set for the first Treasury coupon auctions of the year next week, including three- and 10-year notes. All of next week’s auctions fall earlier in the week than normal in order to conclude by their Jan. 15 settlement date, with the first ones on Monday. A reading of US inflation will follow on Wednesday.