The 8:30 AM Wake Up Call
The numbers hit the tape at 8:30 AM sharp this morning, December 10, 2025, and the reaction in the Treasury pits was instantaneous. The November Consumer Price Index (CPI) printed at 3.2 percent year over year. This is not the victory lap the Federal Reserve wanted. While the consensus among economists at Bloomberg suggested a cool down to 2.9 percent, the reality of sticky service inflation has slammed the door on a quiet end to the year. The 10 year Treasury yield spiked 12 basis points within minutes, touching 4.58 percent as traders realized the pivot to lower rates is hitting a wall of structural reality.
This is the essence of the SNAFU environment described in the latest ING Economics 2026 Outlook. The acronym, born in the chaos of military bureaucracy, stands for Situation Normal: All Fuddled Up. In the context of the 2025 rates market, it describes a Fed that is trapped. They cannot cut rates aggressively because inflation refuses to die, but they cannot hold rates high forever without cracking the regional banking sector. The money is moving, and it is moving toward safety at the short end of the curve while punishing the long end.
The Math of the Terminal Rate Reset
For two years, the market has chased the ghost of a 2.5 percent neutral rate. That dream is dead. Based on today’s data, the smart money is now pricing in a terminal rate of 4.25 percent for the middle of next year. This represents a massive 175 basis point gap from the pre-pandemic norm. Investors who are still holding long duration bonds are essentially picking up pennies in front of a steamroller. The risk reward profile has shifted. If you are holding a 30 year bond at a 4 percent yield while CPI remains north of 3 percent, your real return is negligible after taxes and fees.
Decoding the Yield Curve Inversion Persistence
We are witnessing a historical anomaly. The yield curve has remained inverted for a duration that defies traditional economic modeling. Usually, an inversion is a short warning. This time, it is a permanent feature of a fractured market. The 2 year Treasury is currently yielding 4.82 percent, while the 10 year sits at 4.58 percent. This 24 basis point inversion tells us that the market expects a recession, yet the labor data remains stubbornly tight. Per the Reuters market desk, the spread between junk bonds and Treasuries is also starting to widen, suggesting that the era of cheap corporate refinancing is officially over.
Specific Forecasts for the 2026 Fiscal Cycle
The volatility we see today is a precursor to a messy Q1. The Fed’s dot plot, which will be updated in the FOMC meeting next week, is likely to show a shallower path of cuts than the market previously hoped for. Our analysis suggests the following trajectory for the Fed Funds Rate based on current inflationary momentum.
| Period | Projected Fed Funds Rate | Implied Change (bps) | Primary Risk Factor |
|---|---|---|---|
| Q4 2025 (Current) | 4.75% | 0 | Hot CPI Print |
| Q1 2026 | 4.50% | -25 | Credit Contraction |
| Q2 2026 | 4.25% | -25 | Commercial Real Estate |
| Q3 2026 | 4.25% | 0 | Energy Price Rebound |
The Execution Strategy: Follow the Money
The actionable trade in this environment is not in chasing the S&P 500 to new highs. The real movement is in the “belly” of the curve. Shorting the 10 year Treasury via inverse ETFs or put options has become a crowded but necessary hedge for institutional desks. For the retail investor, moving into floating rate notes (FRNs) provides a shield. These instruments reset their coupons based on short term interest rates, allowing you to capture the yield of a high rate environment without the price sensitivity of long term bonds.
The technical mechanism of the current market failure is a lack of liquidity at the long end. When the Treasury issues trillions in new debt to fund the deficit, they need buyers. If the Japanese and Chinese central banks continue to pull back, domestic buyers will demand a higher term premium. This is why the 10 year yield could realistically test 5.0 percent by the spring, regardless of what the Fed does with the short term Fed Funds rate. The bond vigilantes have returned, and they are demanding to be paid for the risk of holding US sovereign debt in an era of fiscal expansion.
The next major milestone for this narrative arrives on January 14, 2026. On that day, the first retail sales report of the new year will be released. If consumer spending drops below the 0.2 percent threshold while inflation stays above 3 percent, the SNAFU transition will be complete. We will be firmly in a stagflationary trap where the Fed has no good options left. Watch that 0.2 percent retail number. It is the final tripwire for the soft landing myth.
