- Yields on 2- to 5-year Treasurys indicate the Fed is close to ending its rate-cutting cycle, with only modest further easing expected.
- The Fed’s December 2025 quarter-point cut to 3.50%-3.75% came with notable internal dissent, and its dot plot signals just one more cut in 2026.
- Intermediate Treasury yields remain elevated while long-term yields are constrained by sticky inflation, fiscal worries, and a likely higher neutral rate.
- Investors are favoring intermediate maturities and cautious curve-steepening trades while closely watching inflation and labor-market data.
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The “belly” of the U.S. Treasury yield curve—the 2- to 5-year maturities—is now signaling that Federal Reserve rate cuts are likely near their limit. Bond investors have recently rotated out of long maturities toward intermediate ones, reflecting expectations of only modest further easing. Key economic indicators—sticky inflation, resilient labor markets, and recent fiscal stimulus—have constrained how far and how fast the Fed can cut.,
At its December 2025 meeting, the Fed reduced the fed funds rate by 25 basis points to a target range of 3.50 %-3.75 %. But the 9-3 vote was sharply divided: two dissenters preferred no cut and one favored a larger reduction, underscoring internal uncertainty., The Federal Open Market Committee’s charted projections (“dot plot”) now expect only one additional cut in 2026, even as markets continue to anticipate two or more.,
Yield metrics support the narrative. On or around December 5, 2025, the 2-year Treasury yield was approximately 3.56 %, the 5-year around 3.70-3.75 %, and the 10-year near 4.14 %. This indicates intermediate‐term yields are elevated, and long‐term yields are being held up by inflation expectations, term premium, and fiscal concerns., The neutral rate is increasingly seen by many analysts as being higher than earlier expectations—perhaps around 3.0 %—which limits the upside for long maturities during an easing cycle.,
Strategically, investors should consider the following:
- Focusing on intermediate maturities offers more carry and less duration risk in a shallow easing environment.
- Long bonds may underperform if inflation fails to fall toward the 2 % target or if fiscal deficits continue to elevate term premiums.
- High‐quality fixed income sectors and yield curve steepening trades could benefit from Fed pauses.
- Macroeconomic data—especially core inflation, labor market strength, wage growth—will be the critical pivots for rate decisions.
Open questions include:
- What is the true neutral rate, especially in a post‐COVID, high fiscal debt environment?
- Can inflation decline smoothly in 2026 or will supply shocks, wage pressures, or fiscal stimulus re-inflate expectations?
- How will shifts in Fed leadership (beyond early 2026) change policy hawkishness vs dovishness?
- Will the labor market weaken enough to justify more than one cut, or will unemployment and employment data hold up?
Supporting Notes
- The Fed made its third rate cut in 2025 in December, lowering the target range to 3.50‐3.75 % in a 9-3 vote—two dissenters wanted no cut and one wanted a larger cut.,
- Bloomberg News economists surveyed November 28–December 3 expect that Fed to follow up the December cut with two more quarterly cuts in 2026.
- The Fed’s December dot plot (its own median projections) show only one rate cut next year.,
- 2-year Treasury yield was around 3.56 % and 5-year around 3.70-3.75 % as of early December 2025.
- Investors are favoring intermediate maturities (“the belly”) as long-term Treasurys are less attractive due to lingering inflation and a higher neutral rate.,
- Economists—including those at Goldman Sachs and Bank of America—have revised down the number of expected rate cuts in 2026 due to resilient inflation.,
Sources
- www.investing.com (Investing.com) — 2025-12-08
- economictimes.indiatimes.com (Economic Times) — 2025-12-2025
- kpmg.com (KPMG) — 2025-12-10
- www.reuters.com (Reuters) — 2025-12-30
- ycharts.com (YCharts) — 2025-12-15