Market Liquidity Reaches a Breaking Point Post-FOMC
The 4.0% psychological floor for the 10-year Treasury yield did not just crack; it evaporated. Following the Federal Reserve decision yesterday, December 17, 2025, to maintain the federal funds rate while signaling a more aggressive easing cycle for next year, the bond market has entered a period of violent repricing. This is not a flight to safety. It is a calculated liquidation of the inflation-scare trade that dominated the third quarter. As of 10:00 AM EST on December 18, 2025, the 10-year yield sits at 3.88%, a staggering 27 basis point drop from its November peak.
Institutional desks are no longer debating if the Fed will cut; they are debating how deep the scars of the current restrictive policy will run before the first 25-basis-point reduction arrives in March. According to the latest real-time bond data, the yield curve remains stubbornly inverted, yet the spread between the 2-year and 10-year notes has narrowed to -14 basis points, the tightest margin since the brief normalization attempt in late 2024.
The Death of the Term Premium
Investors are abandoning the demand for a term premium. The logic is clinical. If the Fed is committed to a target inflation rate of 2% and the November CPI print of 2.3% suggests they are within striking distance, there is no technical reason to demand a 4.5% yield on long-dated debt. The market is effectively doing the Fed’s work for it, loosening financial conditions before a single policy vote has changed. This creates a feedback loop where falling yields lower mortgage rates and corporate borrowing costs, potentially reigniting the very inflation the Fed is trying to extinguish.
The data below illustrates the compression across the curve over the last thirty days, highlighting the collapse in the belly of the curve (the 5-year and 7-year notes) as traders bet on a rapid return to a neutral rate environment.
| Treasury Instrument | Yield (Dec 18, 2025) | Yield (Nov 18, 2025) | Basis Point Shift |
|---|---|---|---|
| 2-Year Note | 4.02% | 4.35% | -33 |
| 5-Year Note | 3.91% | 4.22% | -31 |
| 10-Year Note | 3.88% | 4.15% | -27 |
| 30-Year Bond | 4.12% | 4.38% | -26 |
Dissecting the Duration Trap
Passive bond funds are currently caught in a duration trap. For the last 18 months, the consensus was to stay short. The ‘Higher for Longer’ mantra kept capital parked in T-bills and money market funds. Now, the sudden pivot in sentiment is forcing a massive rotation into longer-duration assets to lock in yields before they slide toward 3.5%. This rotation is causing a liquidity vacuum. When every major desk at Goldman Sachs and JPMorgan attempts to buy duration simultaneously, the resulting price action is exponential, not linear.
The technical mechanism driving this is the unwind of the basis trade. Hedge funds that were shorting Treasury futures against long positions in the cash market are being squeezed. As the gap between futures and cash narrows, these funds must cover their shorts, adding fuel to the rally in bond prices and the subsequent crash in yields. This is visible in the CBOE 10-Year Treasury Yield Index, which shows a sharp vertical descent over the last 48 hours.
Visualizing the Yield Curve Collapse
The following visualization depicts the yield curve as it stands today, December 18, 2025, compared to the aggressive peak seen just 30 days ago. The flattening of the curve suggests that the market no longer expects a ‘soft landing’ but is instead pricing in a period of economic stagnation that will require significant central bank intervention by mid-year.
The Treasury’s Stealth Intervention
One overlooked factor in the current yield decline is the U.S. Treasury’s buyback program. In an effort to improve market depth, the Treasury has been actively purchasing older, less liquid bonds and issuing new ones. This ‘stealth QE’ has effectively put a ceiling on yields. When the Treasury buys back its own debt, it creates a constant bid in the market. According to recent Treasury Department announcements, the scale of these buybacks in Q4 2025 has exceeded $50 billion per month. This liquidity injection is masking the underlying fragility of the private market’s appetite for debt.
If the Treasury continues this pace into January, the 10-year yield could easily test the 3.75% support level before the next FOMC meeting. However, the risk remains in the fiscal deficit. The government is expected to issue over $1.8 trillion in new debt next year. At some point, the supply of new bonds will overwhelm the Fed’s dovish rhetoric and the Treasury’s buyback capacity. When that happens, the ‘yield floor’ will not just be a memory; it will be a target for a massive spike back toward 5%.
Capital Allocation Shifts
Wealth managers are now pivoting away from high-yield corporate credit and back into ‘Plain Vanilla’ Treasuries. The risk-adjusted return on a 10-year Treasury at nearly 4% is suddenly more attractive than B-rated junk bonds yielding 7%, especially as default rates in the commercial real estate sector begin to climb. The spread between Treasuries and corporate debt is widening, a classic signal that the credit cycle is late-stage. For the retail investor, the message from the bond market is clear: the era of easy 5% returns on cash-equivalent money market funds is ending. The race to capture duration is the only game left in town.
The next major data point to monitor is the January 12, 2026, CPI report. If that number shows any sign of an inflation rebound, the current rally in bonds will be exposed as a massive ‘bull trap.’ Conversely, a print below 2.2% will likely send the 10-year yield crashing toward 3.65% by the end of January.
