Assessing the Sustainability of the U.S. Treasury Rally Amid Conflicting Labor Market Signals

The U.S. Treasury market has experienced a notable rally in late 2025, driven by shifting expectations around Federal Reserve policy. As of November 24, 2025, the 10-year Treasury yield stood at 4.07%, down 8 basis points for the week, while the 2-year yield fell to 3.51%. This decline reflects growing speculation that the Fed may cut interest rates in December, with market pricing for a rate cut rising from 32% to 75% following supportive comments from New York Fed President John Williams according to reports. However, the sustainability of this rally hinges on resolving conflicting signals in the labor market, which remain a key determinant of Fed policy and investor sentiment.

Conflicting Labor Market Signals and Policy Uncertainty

The U.S. labor market has delivered a mixed bag of data, complicating the Fed's decision-making calculus. On one hand, the September 2025 jobs report revealed 119,000 jobs added, exceeding expectations and suggesting resilience according to data. Meanwhile, the unemployment rate rose to 4.4%, the highest in nearly four years, and downward revisions to prior months' employment figures signaled a cooling labor market according to CNBC. This duality has split Fed officials: Mary Daly and John Williams advocate for rate cuts due to weakening labor conditions, while Susan Collins cautions that policy is already "mildly restrictive" according to Senate sources.

Further muddying the waters, initial jobless claims for the week ending November 22, 2025, fell to 216,000-the lowest since mid-April-indicating employers are retaining workers. Yet continuing claims rose to 1.96 million, highlighting persistent challenges in generating new hiring. This dichotomy underscores the lagged nature of labor market indicators and the difficulty in discerning a clear trend.

Fed Policy Dilemma and Market Pricing

The Federal Reserve faces a delicate balancing act. While inflation remains above the 2% target and sticky core inflation is projected to decline only to 2.6% by year-end 2026, the labor market's softness has intensified calls for accommodative policy. A December rate cut is now priced at 65%, with further reductions expected in 2026 according to market data. However, the delayed release of October labor market data-expected after the December 10th policy meeting-has left investors in a data vacuum, prolonging uncertainty.

This uncertainty is reflected in Treasury yields. The 10-year yield has drifted lower toward 4% as rate cut expectations rise, yet lingering inflation risks and the lagged effects of monetary policy keep expectations cautious according to market analysis. The yield curve, derived using a monotone convex spline method, remains inverted for shorter maturities, signaling concerns about near-term economic growth according to market reports.

Implications for the Treasury Rally's Sustainability

The current Treasury rally appears supported by near-term rate cut expectations, but its long-term sustainability depends on resolving labor market ambiguity. If the Fed proceeds with a December cut and subsequent reductions in 2026, Treasury yields could continue to trend lower, bolstering the fixed income rally. However, risks persist:
1. Sticky Inflation: Core inflation's slow decline could force the Fed to delay or scale back rate cuts, pressuring yields upward.
2. Labor Market Rebound: A stronger-than-expected jobs report in October or November could reverse market expectations, triggering yield spikes.
3. Policy Lags: The delayed impact of previous tightening cycles may mean the labor market's softness is temporary, complicating the case for sustained easing.

Economic forecasts add nuance. While 2026 GDP growth is projected at 1.8–2%, the implementation of new import tariffs and stricter immigration enforcement could subtract 0.25–0.75 percentage points. Conversely, AI-driven productivity gains might offset these headwinds, creating a more favorable environment for Treasury prices.

Conclusion

The U.S. Treasury rally is firmly rooted in the anticipation of Fed rate cuts, but its durability depends on the resolution of conflicting labor market signals. Investors must remain vigilant to evolving data, particularly the October jobs report and subsequent policy decisions. While the current trajectory suggests a continuation of the rally, the path forward is fraught with uncertainty-a reality that underscores the importance of hedging against both inflationary and deflationary risks in a volatile market environment.