The U.S. Treasury market's heated debate over the Federal Reserve's future rate-cut trajectory is intensifying as a wave of critical economic data looms. This week's releases will largely fill the information void left by the government shutdown, with delayed monthly employment and inflation figures set for publication. Additional key jobs data will follow in early January 2026. These reports will help answer the market's central question: whether the Fed's easing cycle is nearing its end after three consecutive cuts or requires more aggressive action.

For bond traders, the stakes are high. Despite persistent inflation, markets are pricing in two 2026 rate cuts to support employment and growth—one more than currently signaled by the Fed. A correct bet could pave the way for another Treasury rally, building on 2025's best performance since 2020. "Tuesday's jobs report might be the single most important data point for next year's direction," said George Catrambone, Head of Fixed Income at DWS Americas. "The labor market's trajectory will dictate rate movements."

Catrambone, who recently increased Treasury holdings during last week's yield spike, belongs to the camp expecting substantial cuts—potentially amplified by recent soft labor indicators. As trading opened this week, policy-sensitive 2-year yields hovered near 3.5%, with 10-year yields around 4.2%. Last week's 25-basis-point cut to 3.5%-3.75% and Chair Powell's emphasis on hiring concerns at Wednesday's press conference have since pulled yields from recent peaks.

Traders are now positioning via options to capitalize on potential first-quarter cut expectations. Current pricing shows markets haven't fully priced the next cut by mid-2026, with a second cut anticipated in October.

All eyes turn to this week's data, covering November and some October metrics. Consensus forecasts suggest November nonfarm payrolls grew by 50,000—below September's delayed-but-strong 119,000 reading, though unemployment hit 4.4%, a 2021 high. WisdomTree's Kevin Flanagan cautions that shutdown-disrupted data collection may diminish this report's significance, shifting focus to early January's pre-FOMC releases. "The bar for a January cut has risen," said Flanagan, the firm's Fixed Income Strategist. "We'd need clear labor market cooling."

Strategist Ed Harrison notes that sustaining the bond rally requires December 16's jobs data to show weakness: "A sub-50,000 print could bring forward the first fully priced cut from June to April." Flanagan warns that November numbers matching September's strength might trigger selloffs, pushing 10-year yields to 4.25%. He views the easing cycle as nearly complete, citing research suggesting 3.5% as the neutral rate—a stance echoing Powell's recent comment that rates now sit within neutral "estimate ranges."

Swaps indicate traders expect terminal rates near 3.2%. Should the Fed hold firm amid sticky inflation, 2026 may bring range-bound trading rather than a bull market, with most returns coming from ~4% coupon payments.

Divisions exist among Fed officials too. Chicago Fed President Goolsbee, last week's lone dissenter, cited insufficient inflation data. Another wildcard approaches: Powell's term ends in May 2026, with President Trump's pressure for deeper cuts potentially shifting focus from data to succession politics. "A new chair inherently leans dovish," said Janet Rilling of Allspring Global Investments. "Even modest labor softening could justify cuts without major unemployment spikes."