The Fed's Dovish Pivot: Why Treasury Yields Are Set to Fall Further in 2026

The U.S. labor market, once a pillar of economic resilience, is showing signs of structural fragility that could force the Federal Reserve into a more aggressive dovish pivot in 2026. The November 2025 jobs report, though clouded by a government shutdown that disrupted October data collection, provides critical insights into this shifting dynamic. With nonfarm payrolls edging up by just 119,000 in September and economists forecasting a meager 50,000 gain for November, the labor market's momentum is clearly waning according to the report. These trends, compounded by technical issues in data collection and speculative estimates of a 4.6%–4.7% October unemployment rate, underscore a cooling that could justify further rate cuts by the Fed.

Labor Market Dynamics: A Tale of Stagnation and Structural Shifts

The November jobs report, while officially pegging the unemployment rate at 4.4%, masks deeper challenges.

The delayed data reveals a labor market that has stagnated since April 2025, with nonfarm payrolls growing by a mere 119,000 in September-a figure that reflects minimal progress despite the absence of a recession. Sectoral shifts further complicate the picture: job gains in healthcare and food services are offset by losses in transportation, warehousing, and federal government employment, the latter exacerbated by the shutdown.

Moreover, the labor market is grappling with external headwinds. Uncertainty around President Trump's import tariffs, the lingering drag of high interest rates, and the accelerating adoption of automation technologies are creating a "softening" environment according to economic analysis. These factors are not merely cyclical but structural, suggesting that the labor market's resilience is being eroded by forces that transcend traditional monetary policy tools.

Policy Positioning: The Case for a Dovish Pivot

The Fed's next move hinges on its ability to distinguish between temporary data distortions and persistent weakness. While the November 4.4% unemployment rate aligns with the Chicago Fed's 4.44% projection, the absence of October data-a period likely marked by a rise in unemployment- casts doubt on the reliability of these figures. If the Fed interprets this as a signal of broader slack in the labor market, it may accelerate rate cuts to preempt a deeper slowdown.

Historically, the Fed has acted preemptively in the face of labor market deterioration. The current context-marked by weak wage growth, a flattening of payroll gains, and rising uncertainty-resembles the conditions that preceded the 2020 and 2008 rate cuts. A dovish pivot would not only stabilize financial markets but also address the risk of a self-fulfilling slowdown driven by business and consumer caution.

Investment Implications: Long-Duration Assets in Focus

The anticipated dovish pivot creates a favorable environment for long-duration assets. Treasury yields, already pressured by weak inflation expectations and declining growth, are poised to fall further as the Fed signals rate cuts. The November jobs report's muted data, combined with the technical issues in the household survey which could introduce upward bias in unemployment estimates, strengthens the case for a yield decline. Investors should prioritize long-duration Treasuries, which benefit from both falling rates and a flight to safety amid policy uncertainty.

Growth equities, particularly those in sectors insulated from cyclical downturns (e.g., healthcare, technology), also stand to gain. Lower discount rates amplify the present value of future cash flows, while the Fed's accommodative stance supports risk-on sentiment. However, investors must remain cautious about overexposure to sectors vulnerable to trade policy shifts or automation-driven dislocation.

Conclusion

The November 2025 jobs report, though imperfect, provides a stark reminder of the labor market's fragility. As the Fed navigates a landscape of structural headwinds and data uncertainties, a dovish pivot appears increasingly likely. This policy shift will not only drive Treasury yields lower but also reshape asset allocation strategies for 2026. Investors who position for a prolonged period of accommodative monetary policy-favoring long-duration assets and defensive equities-stand to outperform in an environment where patience and foresight are paramount.