Update Bonds: Rising odds for a US rate cut in December
After Nvidia announced impressive quarterly results, its share price initially surged on 20 November. However, sentiment shifted during the trading session, resulting in a 3% decline for the artificial-intelligence leader by the close of the day.
One factor contributing to this reversal was the release of the US jobs report, which initially sparked investor concerns about the likelihood of an interest-rate cut in December.
In October, Federal Reserve Chair Jerome Powell indicated that a further rate cut at the December meeting was “far from a foregone conclusion” due to inflation remaining above the Fed’s 2% target. However, a softening labour market could encourage the Fed to resume its easing cycle. The delayed September jobs report revealed that payrolls rose at more than double the consensus expectations, leaving limited room for a rate cut in December. Nonetheless, the president of the New York Fed suggested that there is room for lowering rates again in the near term, noting that downside risks to employment have increased, while upside risks to inflation have eased. Several other Federal Reserve officials echoed these dovish sentiments throughout the week.
The probability of the Fed easing its policy rate by 25 basis points on 10 December has risen dramatically. The 10-year US Treasury yield fell below 4%, reaching its lowest level this month. Similarly, the two-year Treasury yield dropped by 15 basis points, moving in tandem. The US yield curve has steepened this year, a trend we expect to continue into 2026. However, the spread between ten-year and two-year Treasury yields has remained relatively stable since April, hovering near 0.5%.
In Germany we see a similar trend in yield curve steepening. German yields have increased this year due to a rising term premium, which investors are demanding in light of a projected increase in government spending over the coming years. The steepening of the German sovereign curve was evident in the first months of this year. Since mid-April, yields across the curve have been rising in parallel. The spread between ten-year and two-year bond yields has even slightly narrowed, decreasing by 15 basis points since September.
We expect that the term premium will continue to rise in 2026, further steepening yield curves in both the US and Europe. In this context, it is advisable to mitigate excessive duration risk. (Duration is a measure of a bond’s sensitivity to changing interest rates.)