Robert Tipp, chief investment strategist, fixed income, and head of global bonds at PGIM has commented on why the Federal Reserve’s December rate cut may prove more consequential than markets are currently pricing, particularly ahead of the Fed’s January meeting.
In the U.S., the Fed’s 25 bp rate cut in December carried a dovish tone, leading to a bull steepening along the curve with only slight movement in the 10-year yield.
The narrow move on the 10-year underscored its prevailing low-volatility, range-bound conditions throughout 2025.
At this point, we believe a January rate cut remains possible on the way to a 3% Fed funds rate by the end of Chair Powell’s term in May.
While not our base case, once a new Fed chair is confirmed, the potential exists for the policy rate to decline towards a sub-neutral range of 2.0–2.5% in the second half of 2026.
After the record-long shutdown of the Federal government, the resumption of government-provided data could contribute to an increase in implied and realized volatility and prompt the 10-year yield to break out of its tight trading range.
We believe that the low-volatility trajectory observed in the accompanying chart is unlikely to continue.
High and range bound yields look set to persist, allowing this slow-go bull market to continue, where returns accrue not by a quick drop in yields and rise in prices, but rather thanks to the ongoing earning of yield itself.
