Powell's "Christmas gift": US Treasury yields break above 4.6%

The annual Christmas season is approaching, and the U.S. Treasury market has received "bad news," with long-term bond yields hitting a seven-month high, all attributed to Powell's "Christmas gift"—hawkish interest rate cuts. Overnight, the yield on the U.S. 10-year benchmark Treasury bond peaked above 4.6%, the highest since May, rising about 20 basis points since last week's Federal Reserve interest rate cut, before slightly retreating at the close. The yield on the 30-year U.S. Treasury bond also touched its highest level since late April before turning down, while the two-year Treasury yield remained roughly flat in the range of 4.33% to 4.363%. On Wednesday, the U.S. stock and bond markets will be closed for the Christmas holiday. The market movements, which do not quite match the festive atmosphere, can be attributed to Powell's "Christmas gift"—hawkish interest rate cuts. Last week, the Federal Reserve lowered its interest rate cut forecast, suggesting only two more cuts in 2025, down from the four cuts indicated in September. The futures market currently expects the federal funds rate to reach around 4% by the end of next year, implying one to two rate cuts. Several financial institutions have provided different interpretations of the Federal Reserve's policy stance. Standard Chartered analyst Steve Englander stated: Both we and the market were surprised by the hawkish tone that emerged from the changes in the Federal Open Market Committee's economic forecasts, which is clearly a risk-off event... Federal Reserve Chairman Powell's main explanation for this shift is the rise in core inflation data over the past two months, although he noted that some forecasts have already taken into account the expected impact of the incoming Trump administration's policies. The increase of the 2025 core PCE inflation rate from 2.2% to 2.5% is particularly noteworthy—only three participants believe the core inflation rate will be below 2.4% or lower, therefore rounding down cannot bring the 2025 forecast to target in any case. TS Lombard analyst Steven Blitz is celebrating a victory, believing that: The market is unsettled because the Federal Reserve did not act as they expected, but the Fed did exactly what we have always anticipated—lowering the funding rate to 4.25% between September and the end of the year according to the Taylor rule, and that the rate will remain at this level until there is a substantial change in the economy. I wrote about this again last July and September. Once inflation falls below the funding rate and employment begins to slow, considering that inflation is ultimately a lagging indicator, the FOMC has returned to model-based policy decisions, and guidance on inflation or employment is a smokescreen. Barclays believes that the Federal Reserve Chairman did not seem particularly concerned about the overall strength of the economy during the press conference: Powell did not focus on the possibility of a deterioration in economic or labor market conditions, indicating that FOMC members' concerns about downside risks are not as high as they were in September