Treasuries Are Having a Bad December. What to Watch Out for Next.

The U.S. Treasury Department in Washington, D.C., U.S., on Wednesday, Oct. 8, 2025. (Eric Lee/Bloomberg)

December has been a painful one so far for U.S. Treasury investors. Whether the suffering in the government bond market lasts depends largely on the Federal Reserve.

The iShares 20+ Year Treasury Bond exchange-traded fund—popular among buyers of longer term U.S. government bonds—fell 2.26% last week. It was the largest weekly decline since the week ending April 11, the onset of tariff drama. Yields on 10-year Treasuries, which rise when prices fall, also rose by the most since April 11.

The market had been pretty humdrum for all of November, making the decline at the kickoff of December notable. Expectation of fewer interest rate cuts in 2026 has led to the selloff, according to Jim Reid, global head of macro and thematic investing at the Deutsche Bank Research Institute. Fewer cuts mean lower Treasury, or so the logic goes. A stronger economy in 2026 is one factor that may limit Fed’s ability to lower rates.

U.S. debt could also be moving in sympathy with its global peers. Prices of French, Germany and Italian government bonds all fell last week. Don’t expect European Central Bank to lower rates anytime soon as data last week pointed to business activity in euro zone expanding and inflation remaining elevated.

Japan’s bonds also sold off last week. Governor of the Bank of Japan indicated an increase in interest rates could be coming.

This week, for one final time this year, the Treasury will sell these key U.S. government bonds; the three-year bill on Monday, followed by the 10-year notes and 30-year bonds on Tuesday and Thursday, respectively.

There’s a risk: The Fed meets on Wednesday to decide on rates. This raises the likelihood that investors would want this major event to pass before committing dollars to 10-year debt. Buyers may even demand lower prices to adjust for the uncertainty, further pressuring the market.

Still, auctions have seen consistently strong demand recently, suggesting that the bigger risk is the Fed meeting itself. Traders are split on how to position for it.

BNP Paribas is shorting the 10-year note, a sign that it expects prices to fall. Why could that happen? The Fed may surprise the market by reducing the median projection to no rate cuts in 2026 from one currently, the French investment bank posited in a Sunday note. Their conviction is also based off December being typically a weak month for Treasuries—the opposite of the S&P 500 —and the “very likely” possibility that the Supreme Court strikes down tariffs.

RBC’s head of U.S. Rates Strategy Blake Gwinn, however, takes a different view. She sees the case for lower prices “rather limited.” That is because the Fed may “underdeliver” on traders fears of fewer rate cuts, and even if they do investors’ reaction may be tempered because of the looming risk of next week’s economic report.

And that includes the November unemployment rate that is out on Dec. 16, November’s inflation report comes out on Dec. 18.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.