After the rate cut, cooling down again! Powell's "hawkish" stance triggers the largest single-day drop in US Treasury yields in almost five months.

As the Federal Reserve cut interest rates as scheduled, US Treasury bonds fell sharply, marking the largest single-day drop in nearly five months. Despite weakening labor market prompting policymakers to cut the benchmark interest rate to 3.75%-4% on Wednesday, Chairman Powell's tough policy signals after the meeting shook the $30 trillion US bond market. He emphasized at a press conference that further rate cuts in December are "by no means a done deal," causing the yield on US bonds across all maturities to jump to the highest level since early June. Kelsey Berro, Fixed Income Executive Director at J.P. Morgan Asset Management, pointed out that Powell is clearly resetting market expectations for a rate cut in December, making December a meeting with "real policy suspense." His statement forced investors to reassess the future path of rate cuts, although the market still sees a high probability of a rate cut in December, traders have significantly reduced their bets. Powell stressed that there is a clear divergence of opinions within the committee, and a decision has not yet been made on the December action. Due to the government shutdown leading to the absence of key economic data for a long time, Powell's words were seen by the market as more instructive than usual. The yield on the two-year Treasury rose by 11 basis points to 3.6%, reaching a one-month high, reflecting a notable repricing of the policy expectations-sensitive end. The implied rate cut magnitude for the Federal Funds rate path in September 2026 has also been increased from 3% to 3.15%. However, some institutions believe that there is limited room for further yield increases. Dan Carter of Fort Washington stated that the weakening job market has become the main basis for two consecutive rate cuts, and it is unlikely that this logic will fundamentally reverse course before the December meeting. US bonds have continued to rise on signs of slowing employment, but inflation remains above the target range of about 3%, and has not reached the 2% target. Priya Misra of J.P. Morgan Investment Management stated that this decision was another "risk-management rate cut" in line with market pricing. But Director Miran supports a larger one-time rate cut, while Kansas City Fed President Schmid advocates for a pause in rate cuts, highlighting the structural rift among committee members on the assessment of labor risks and the level of "neutral rates." Gregory Faranello of AmeriVet Securities pointed out that as Powell's term nears its end, concerns about other members expressing different views has significantly diminished. In another decision that attracted attention, the Federal Reserve announced that it will end its more than three-year balance sheet reduction (QT) operation on December 1st. Since its launch in June 2022, over $2 trillion in funds have been withdrawn from the system. Long-term yields followed suit, with the 30-year yield rising by 8 basis points. Some strategy teams pointed out that the outcome of this meeting deviated from the market's original expectations, which were a one-time 25 basis point rate cut, a faster end to QT, and no hawkish objections. Now, with the release of "hawkish rate cut" signals, it may further push the selling pressure on US bonds to continue.