- The 10-year Treasury yield slipped to about 4.16% as investors balanced resilient retail demand against signs that inflation is easing.
- Manufacturing looks notably weak (ISM PMI 47.9), reinforcing expectations that growth is cooling even as consumers hold up.
- The Fed’s December cut to 3.50%–3.75% came with guidance for only limited additional easing in 2026 while core inflation remains around 2.6%.
- Political scrutiny of the Fed, including a DOJ probe involving Chair Powell, is adding uncertainty and a potential risk premium to rates.
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The Treasury market’s retreat in the 10-year yield to approximately 4.16% reflects a realignment of expectations: inflation, while still above the Fed’s 2% target, appears to be cooling—core CPI is estimated near 2.6–2.7% year-over-year—while industrial activity is weakening markedly. Investors are pricing in a “Goldilocks” scenario in which inflation no longer accelerates, the Fed remains restrictive but patient, and growth moderates rather than collapses. [Primary source; additional inflation data from authoritative reports.]
Industrial data offer warning signs: the ISM manufacturing PMI fell to 47.9 in December 2025—10 months straight in contraction—indicating broad weakness in factory output, new orders, and hiring in that sector. This is acting as a counterbalance to the strong consumer side, which has proven resilient, especially in categories tied to holiday spending and retail. [Corroborated by Reuters and ISM data.]
On monetary policy, the Fed cut rates by 25 basis points in December. Rate setters now appear divided: the dot plot suggests only one additional cut in 2026. Key Fed officials have emphasized the need for more inflation moderation and greater clarity on labor market strength before further rate cuts. [Firm‐level projections confirm this cautious outlook.]
Complicating the policy landscape is a growing political confrontation. A DOJ investigation into Chair Powell related to the renovation of the Fed’s headquarters has raised bipartisan alarm over threats to the Fed’s independence. Market experts warn this could lead to higher risk premiums in yields if investors believe political pressure may force premature easing—undermining credibility. [Multiple sources confirm these concerns.]
Strategically, sectors sensitive to long rates—housing, real estate financing, mid-caps—stand to gain if yields remain in this region. Banks remain exposed to flattening yield curves and regulatory caps (e.g., proposed credit card rate caps). Industrials may continue to struggle under weak demand and high costs. Investors should prepare for scenario where rate cuts are delayed or smaller than currently priced.
Supporting Notes
- Headline U.S. inflation held steady at 2.7% year-over-year in December 2025; Core CPI (excluding food and energy) was approximately 2.6% y/y. [Inflation reports] [Primary article]
- Fed’s target federal funds rate was cut in December 2025 to the range of 3.50%–3.75%; signaling that further cuts are expected in H1 2026 but likely one or two modest reductions. [FOMC minutes, market analysis]
- ISM manufacturing PMI dropped to 47.9 in December 2025, marking the tenth consecutive month of contraction; new orders sub-index dropped, employment in manufacturing fell. [Manufacturing data] [Additional sources]
- Existing home sales rose in December by 5.1% (seasonally adjusted annual rate), median home price at approximately $405,400; inventory tight. [Housing market] [Reuters AP news]
- A DOJ criminal investigation into Fed Chair Jerome Powell, tied to a $2.5B renovation project, has prompted concerns over political pressure on monetary policy and central bank independence. [Multiple sources]
- Retail sales in December 2025 rose solidly—motor vehicles up substantially; spending excluding autos and gas also posted positive growth. [Census Bureau / Econoday] [Additional analyses]