The tried-and-true measure of inflation that the federal government monitors most closely is the Personal Consumption Expenditures (PCE) index, which was published this morning. The year-over-year headline number rose from 2.7% to 2.8%, and the core calculation dropped from 2.9% to 2.8%. So that’s a mixed bag, but it is important to note that the Fed themselves forecast PCE to finish off 2025 at 3.1%. And since it’s coming in lower than they had projected, the markets are increasing the probability that the Fed will decrease their Overnight Rate when they meet next week, for the last time this year. As of this morning, there’s an 87.2% chance that they will trim their overnight rate by 0.25% on December 10th. Bond traders are currently selling US Treasuries ahead of the Committee meeting, which is causing the yields of those Treasury Notes to rise, and taking mortgage interest rates with them.
Bond prices have a functionally inverse relationship with the yield (rate) of the Note (loan). Meaning that when interest rates go down, the price of the underlying security goes up. Banks aren’t stupid so they make money either way – –either charging higher interest rates or charging a higher fee. So one might be surprised that Bonds are currently selling off when the price is projected to be higher a week from today, right? Could one not wait another seven days and harvest a higher profit?
Here’s the answer. The last three times that the Fed has cut their overnight rate, the yields on long-term debt like mortgages, 10 and 20 Year Notes, etc. have risen. So even though FOMC is likely to cut interest rates next week, it doesn’t necessarily mean that long-term rates will drop. In fact, the market is betting on higher rates and lower prices next week, which is why they are selling today.
