Anticipating the December Fed Rate Cut: Tactical Opportunities in the Treasury Market

The Federal Reserve's December 2025 policy meeting has become a focal point for investors, with market pricing indicating an 84.3% probability of a 25-basis-point rate cut to a target range of 3.50%-3.75% according to market pricing. This expectation, corroborated by Reuters' 89% probability estimate according to Reuters, reflects a consensus that the Fed will act to address moderating inflation and a cooling labor market. For Treasury market participants, the implications extend beyond the immediate rate decision, as yield curve dynamics and historical patterns of Fed easing cycles offer actionable insights for portfolio positioning.

The Swoosh-Shaped Yield Curve: A Tale of Divergence

The U.S. Treasury yield curve has taken on a distinctive "swoosh" shape, characterized by a sharp decline in short-term rates followed by a rise in longer-term yields. As of November 26, 2025, the 2-year Treasury yield stood at 3.45%, while the 10-year yield was at 4.00%, creating an inverted spread of 55 basis points. This inversion contrasts with the typical flattening or steepening seen during past easing cycles and underscores a decoupling between short-term and long-term expectations.

The divergence is rooted in the Fed's aggressive rate-cutting trajectory since September 2024, which has reduced the federal funds rate by 1.25 percentage points. Short-term real rates have fallen by 2.4 percentage points, while long-term real rates have edged upward, reflecting investor concerns about inflation persistence and fiscal policy. Forward rate analysis further highlights this split: the 5y1y rate (five-year forward one-year rate) has declined, while the 10y1y rate has risen, creating a 152-basis-point spread according to analysis. This suggests a market expectation of a steepening yield curve in the medium to long term, as short-term rates are projected to rise between years five and 10.

Historical Context: Lessons from Past Easing Cycles

The current easing cycle defies historical norms. While the 2019 cycle-marked by three rate cuts-coincided with a stable yield curve and a subsequent 2020 recession according to data, the 2024–2025 cycle has seen a prolonged 35-month inversion without an immediate economic downturn according to research. This anomaly raises questions about the reliability of the yield curve as a recessionary signal in an era of global uncertainties, including trade tensions and fiscal stimulus according to analysis.

Comparing the 2024–2025 cycle to the 2020 pandemic-driven easing, which slashed rates to near zero but triggered inflationary pressures, highlights the Fed's delicate balancing act. Today's rate cuts aim to support growth while avoiding a repeat of 2020's inflation surge. The 2024–2025 cycle also contrasts with the 2009 Great Recession response, where the Fed's easing led to a gradual normalization of the yield curve.

Tactical Opportunities: Navigating the Duration Dilemma

For investors, the current yield curve environment presents a "duration dilemma." Extending portfolio duration to capture higher long-term yields carries risks, including inflation surprises and term premiums that could erode returns. Conversely, short-term Treasuries offer limited yield, with the 2-year note yielding just 3.45%.

The optimal strategy lies in targeting the "belly" of the yield curve-medium-term maturities (3–7 years)-which historically outperform during shallow rate-cut cycles. This approach capitalizes on the Fed's projected path of further cuts, with the federal funds rate expected to reach 3.6% by year-end 2025 and 3.4% by 2026. Intermediate-duration bonds also benefit from a narrower term premium compared to long-dated Treasuries, which face limited demand and potential underperformance according to analysis.

Equity investors should also consider the implications of Fed easing. Historically, the 12 months following a rate cut have delivered positive equity returns, though outcomes vary with macroeconomic conditions. With GDP growth forecasts at 2.9% in October 2025, equities may continue to benefit from accommodative monetary policy, particularly in sectors sensitive to lower borrowing costs.

Conclusion: Positioning for a Shifting Landscape

The December 2025 rate cut is a near-certainty, but its broader impact hinges on how the Fed navigates inflation and growth. For Treasury market participants, the swoosh-shaped yield curve and historical precedents suggest a strategic focus on medium-term maturities and a cautious approach to long-duration assets. As the Fed's easing cycle unfolds, investors must remain agile, balancing the allure of higher yields with the risks of an unpredictable macroeconomic environment.