Overnight, the Federal Reserve cut by 25bps for the third consecutive meeting to 3.75%. Key takeaways: One, the SEP indicates Goldilocks in 2026. GDP growth was boosted to 2.3% (1.8% previously) while core PCE inflation was shaved down to 2.5% (2.6% previously). Two, the dot-plot was kept unchanged – one cut each in 2026 and 2027. Three, purchases of T bills will begin (USD 40bn per month starting 12 December) as the Fed judged that reserves may have fallen too much. This pace of buying is likely to be maintained for several months before being significantly reduced. This should not be mistaken for QE.
US Treasuries, which had been under pressure over the past few trading days, saw some reprieve as the curve bull steepened. We reckon front-end US yields will likely be anchored for some time. T-bill purchases will likely have some spillovers out to the 2Y tenor. Moreover, we note that the Fed is keeping a dovish stance even as the timing for the next hike is not clear. If this is maintained and worries about Fed independence stays in play, 3.60% may well serve as a cap for 2Y yields. That said, belly-to-longer tenors are trading buoyant. An improved growth outlook translates in the market pricing in tightening in 2028 and an increase in term premium in the back end. 4% may be a floor for 10Y yields as long as the outlook stays benign and risk sentiment stays stable.
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