What happened in the December meeting
At its December 2025 FOMC meeting, the Federal Reserve cut its policy rate by 25bps to a range of 3.50%-3.75%, as widely expected. The decision ended in a 9-3 vote which was the most divided Fed since 2019 with Stephen Miran voting for a larger 50bps cut, while two others (Jeffrey Schmid and Austan Goolsbee) preferred no change to rates. On the balance sheet side, the Fed announced a new program to buy T-bills from 12 December onwards.
Powell noted that the labour market has continued its gradual cooling, and highlighted evidence that official job gains may be overstated. Since April, headline payroll data suggests an average job growth of around +40,000 per month, but Powell pointed to analysis indicating that, after adjusting for statistical “over-counting”, actual job growth could be negative 20,000 jobs per month instead. We believe risk to labour market was the key factor that drove the Fed to cut rates in December instead of waiting till January.
That said, Powell described the decision to cut as a “close call” given upside risk for both unemployment and inflation. Importantly, he also stressed that the Fed is now in a comfortable position to “watch how the data evolves” and highlighted that “the extent and timing” of further cuts would depend on data. Overall, we think the message from December’s meeting signals caution and will adopt a more gradual approach in cutting rates.
The updated “dot plot” which showcases individual fed officials’ expectations on rates signal a median expectation of just one cut for 2026, reflecting rising rate caution. In contrast, current market pricing still indicates two expected cuts in 2026, a quarter-point cut in the first half of 2026, and another by the end of the year. We believe this reflects markets’ belief that tariff-related inflation will remain manageable, while the risk of a weaker labour market is rising, allowing scope for further rate cuts.
Recent economic datapoints you should know
While the US government shutdown has disrupted official data releases (e.g. non-farm payrolls), unofficial labour market metrics continue to signal softening momentum. For instance, ADP’s non-farm figures estimated that 32k jobs were lost in November 2025, following the 42k jobs gained in October 2025. Taken together with Powell’s comments on possible over-counting in the official data, this reinforces the picture of a softening labour market – one that has seen weaker hiring.
Additionally, US continuing claims declined (week ending 22nd Nov), coming in below consensus, while initial jobless claims also fell sharply (week ending 29 Nov). That said, we believe the decline likely reflects Thanksgiving-related distortions rather than a material labour market weakening.
Do note that due to the prolonged shutdown of the US government, which impeded the survey collection process, the Bureau of Labor Statistics (BLS) announced that it will not be publishing the regular October 2025 employment data (non-farm payrolls, unemployment rate) and inflation data. Perhaps, the latest official figures (September numbers) we have are outdated and hence may not reflect today’s conditions.
Opportunities in medium term bonds arise
Looking ahead, we think it is likely that the Fed continues to cut rates into 2026, although at a gradual pace – as we highlighted in our 2026 fixed income outlook. We also believe that the Fed is unlikely to pursue aggressive easing in 2026 and instead adopt a more cautious, data-driven approach.
Against this backdrop, we expect the US treasury curve to steepen further as short and medium-term yields are likely to drift lower while longer-term yields may have less room to decline, given upward pressure from higher inflation expectations and long-term fiscal uncertainties.
In our view, we see growing opportunities in medium term bonds which can benefit from meaningful price appreciation if rate cuts push yields down further, while also enjoying better roll-down returns, as they sit along the steepest segment of the curve. Medium-term yields also offer a meaningful pickup over their shorter-term counterparts That said, we see no rush for investors to exit their short-term bond holdings as elevated short-term yields continue to provide appealing near-term income. Investors seeking exposure to longer tenor bonds should consider being more selective, sticking to higher quality issuers.
Product recommendations
Within the medium-term bond space, for government bonds (key markets we cover), we favour 1) 5 to 10-year US Treasuries, 2) 5 to 10-year Singapore Government Securities, 3) 5 to 7-year Malaysian Government Securities, and 4) 7 to 10-year Australian Treasuries. For corporate bonds, we are comfortable with longer tenors as corporate yield curves are generally steeper, providing greater yield pickup which justifies the incremental duration risk. When it comes to longer tenor bonds, we prefer investment grade over high yield corporate bonds amidst the current macro backdrop (see our 2026 fixed income outlook).
For individual bond recommendations, check out our 2026 fixed income outlook below!
iFAST 2026 Global Fixed Income Outlook: Riding the Recovery Wave
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold NIL positions in the abovementioned securities.
