2026 U.S. Treasurys & Equity Market Analysis: Fading Near-Term Fed Rate Cut Expectations

On January 2, 2026, the Wall Street Journal reported U.S. Treasurys traded with minimal changes due to growing market sentiment that a near-term Fed rate cut is unlikely [3]. In the fixed income market, the 10-year U.S. Treasury yield exhibited early volatility, initially increasing before reversing course to fall 2 bps to 4.15% [1], aligning with the “little changed” characterization. The equity market reacted modestly negatively to fading rate cut expectations: the SPDR S&P 500 ETF (SPY) closed down 0.74%, while rate-sensitive tech stocks Apple (AAPL) and Microsoft (MSFT) declined 0.45% and 0.79%, respectively [0]. Market pricing currently implies two Fed rate cuts in 2026, contrasting with policymakers who largely project only one reduction [2], indicating a reevaluation of near-term easing probabilities.

1. Mixed rate cut expectations drive market uncertainty
   : The gap between market pricing (two 2026 rate cuts) and Fed projections (one cut) creates volatility, as seen in the 10-year yield’s early rise and subsequent reversal [1][2].
2. Tech sector sensitivity to rate policy
   : Major tech stocks underperformed the broader S&P 500 index, highlighting their vulnerability to changing interest rate expectations [0].
3. Sentiment reversal in Treasurys
   : The 10-year yield’s shift from early increases to a modest decline reflects conflicting investor views on the Fed’s near-term policy path [1].

• Risks
  :
  • Upcoming FOMC minutes (January 26, 2026) may confirm reduced near-term rate cut probabilities, further impacting Treasurys and equities [3].
  • Strong economic data (non-farm payrolls, consumer price index) could reinforce the “no near-term cuts” narrative, pressuring rate-sensitive sectors [3].
  • Weak demand for U.S. Treasury auctions in early 2026 could drive yields higher [3].
• Opportunities
  :
  • Weaker-than-expected economic data could revive rate cut hopes, potentially boosting equities and Treasurys [3].

On January 2, 2026, U.S. Treasurys traded with minimal changes (10-year yield: -2 bps to 4.15%) amid fading near-term Fed rate cut expectations [1]. Equity markets reacted modestly negatively, with SPY, AAPL, and MSFT all closing lower [0]. Market pricing implies two 2026 rate cuts, while Fed policymakers project one cut [2]. Decision-makers should monitor upcoming Fed communications, economic indicators, and Treasury auctions to gain clarity on future market direction.