The Federal Reserve just blinked. On December 10, 2025, the FOMC delivered its third consecutive 25-basis-point cut, dragging the federal funds rate down to a range of 3.5% to 3.75%. Markets cheered, but the celebration is premature. While the headline figures suggest a victory over inflation, the underlying mechanics of the fixed-income market tell a far more volatile story. Investors who are simply ‘buying the dip’ in long-duration Treasuries are ignoring a massive divergence between central bank rhetoric and hard data.
The Credit Spread Illusion
Yields are a lie. Or more accurately, the component of yield coming from credit spreads is currently providing zero margin for error. As of late December 2025, corporate credit spreads are hovering at their tightest 10-year percentiles. This means you are not being paid to take on corporate risk. According to Bloomberg, the yield-to-worst on the Bloomberg Aggregate Bond Index sits around 4.33%, but almost all of that is derived from the base rate, not the risk premium.
Lindsay Rosner, head of Multi-Sector Investing at Goldman Sachs Asset Management, has been vocal about this disparity. In her recent year-end briefing, she noted that while she ‘likes bonds,’ the value is no longer in the extremes of the curve. The risk-reward profile for high-yield credit is the thinnest we have seen in the post-pandemic era. If the cooling labor market—highlighted by the modest 150,000 nonfarm payroll print in November—turns into a true freeze, these tight spreads will widen violently, erasing any gains from falling interest rates.
The 43-Day Data Blackout
Trust but verify. This is impossible right now. The 43-day government shutdown that paralyzed Washington through November has left the Federal Reserve flying blind. Key inflation and employment metrics were delayed or suspended, creating a massive informational vacuum. Per Reuters, the minutes from the December FOMC meeting revealed a deeply divided board. Two members voted to hold rates steady, while Governor Stephen Miran actually pushed for a 50-basis-point cut to preemptively strike against labor weakness.
This division is the contrarian’s signal. When the Fed is this split, volatility is the only certainty. The market is currently pricing in two additional cuts for 2026, but the Fed’s own ‘dot plot’ projections—released just two weeks ago—signal only one. This 25-basis-point gap is where portfolios go to die. If the delayed data reveals that inflation remained ‘sticky’ during the shutdown, the Fed will be forced to pause, or worse, reverse course, sending bond prices into a tailspin.
Comparison of 2025 Economic Projections vs. Actual Dec 27 Data
| Metric | Fed Projection (Sept 2025) | Current Reality (Dec 27, 2025) |
|---|---|---|
| Federal Funds Rate | 4.1% | 3.5% – 3.75% |
| 10-Year Treasury Yield | 4.0% | 4.12% |
| Core PCE Inflation | 2.4% | 2.5% |
| Unemployment Rate | 4.4% | 4.1% |
Targeting the Belly of the Curve
Stop chasing long bonds. The 10-year Treasury yield actually rose to 4.12% following the December rate cut, a counter-intuitive move that suggests the market is losing faith in the Fed’s authority over long-term inflation. The ‘neutral rate’ is shifting. Goldman Sachs’ Lindsay Rosner suggests that the ‘sweet spot’ is currently intermediate duration—specifically the 5-year area of the curve. This ‘belly’ of the curve offers the best protection against a potential policy error while still capturing yield from a Fed that is clearly in easing mode.
The technical mechanism at play here is ‘curve steepening.’ As short-term rates fall due to Fed cuts, but long-term rates remain anchored by fiscal deficit concerns and inflation fears, the yield curve is finally un-inverting. This is historically a precursor to recessionary pressure, but in the current 2025 landscape, it represents a ‘normalization’ that punishes those holding 20-year and 30-year paper. According to the Federal Reserve, the balance sheet reduction (Quantitative Tightening) is still a factor, though its pace is being questioned as liquidity enters a critical phase.
Inflation-linked bonds like TIPS are another trap. With the November CPI cooling to 3.0%, the ‘inflation protection’ component of these bonds is yielding less than nominal counterparts. Unless you believe a supply shock—perhaps from the new tariff regimes expected in early 2026—will reignite consumer prices, the real yield on TIPS is currently uninspiring compared to high-quality short-term corporate paper.
The next major milestone is the January 2026 inauguration and the subsequent unveiling of the new administration’s fiscal agenda. Market watchers are already eyeing the 4.25% resistance level on the 10-year Treasury. If fiscal spending projections exceed the 1.7% GDP growth target the Fed has set for next year, expect a rapid sell-off in the long end as the market re-prices for ‘higher for longer’ fiscal reality, regardless of what the Fed does with the overnight rate.
