Treasury Yields Slip as Fed Meeting Looms
10-year yield drops to 4.58% as investors position for FOMC decision. Rate pause expected but forward guidance in focus.
Bond traders are playing defense ahead of the Fed.
Treasury yields fell Monday as investors positioned for this week's FOMC meeting. The 10-year yield dropped to 4.58%, retreating from the 4.70%+ levels seen earlier this month. The two-year yield, more sensitive to near-term rate expectations, held near 4.28%.
The moves reflect positioning rather than conviction. Nobody expects a rate change Wednesday—futures price the hold at near certainty. But Chair Powell's press conference could shift the narrative on when cuts resume, and traders don't want to be caught offside.
The Yield Picture
January has been volatile for Treasuries.
The 10-year yield opened 2026 at 4.52%, spiked to 4.73% on January 13 following hotter-than-expected inflation data, then whipsawed through the Greenland tariff drama that roiled risk assets mid-month. The round-trip left yields roughly flat year-to-date, but the path was anything but calm.
Today's decline comes amid light volume. Federal government offices in Washington are closed due to inclement weather, though the Fed confirmed it will proceed with scheduled releases. Holiday-thinned trading can amplify moves in either direction.
The yield curve remains mildly inverted, with two-year yields above tens by roughly 30 basis points. That inversion—historically a recession signal—has persisted longer than most economists expected without an actual downturn materializing.
What Traders Are Watching
Wednesday's statement will be parsed for any shift in language around inflation or employment.
The Fed's December meeting emphasized patience, with officials signaling they needed more evidence that inflation was sustainably declining before resuming cuts. Since then, the data has been mixed. December CPI surprised to the upside, but Friday's consumer sentiment survey showed inflation expectations dropping to 4.0%—a positive sign.
The labor market remains the wild card. December's 50,000 jobs print was the weakest since the pandemic, though one month doesn't make a trend. If Powell acknowledges softening employment conditions, markets could reprice toward earlier and faster cuts.
More likely, the message stays consistent: progress on inflation, but more data needed. That keeps the June timeline for the next cut intact and avoids giving markets an excuse to rally on dovish signals.
Global Context
U.S. yields are moving in tandem with global bond markets.
Earlier this month, a global bond selloff driven by Japanese government bond volatility pushed yields higher across developed markets. That pressure has since eased, but correlations between U.S., European, and Japanese rates remain elevated.
The European Central Bank meets Thursday, one day after the Fed. Markets expect a 25 basis point cut from the ECB, bringing its deposit rate to 2.75%. The divergence—Fed on hold while Europe cuts—typically strengthens the dollar, though that trade has been choppy this year.
Positioning for the Week
Earnings dominate the equity calendar, but bonds matter too.
The Treasury will auction $60 billion in five-year notes Tuesday and $44 billion in seven-year notes Thursday. Auction results can move markets if demand comes in weaker than expected. Foreign buyers, particularly from Japan and China, have been sporadic participants lately.
For bond bulls, the case rests on economic cooling. If Q4 GDP disappoints or January jobs data (due next Friday) shows further weakness, yields could test 4.40% on the 10-year. Bears counter that inflation remains sticky and the Fed has limited room to cut without reigniting price pressures.
The middle ground—and the consensus view—is that yields trade in a range between 4.40% and 4.80% through the first quarter. Breaking either level would require a meaningful surprise from the Fed, inflation data, or employment figures.
Until then, expect more back-and-forth. The bond market hasn't found its footing for 2026, and Wednesday's FOMC meeting is unlikely to provide clarity. For market watchers, that means staying nimble and watching Powell's every word.