(Jan 12): Bond investors’ overarching wager on the path of the US Federal Reserve (Fed) and the Treasuries market in 2026 looks like it has room to run.
A much-anticipated employment report last Friday showed job growth was below forecasts last month, leaving intact expectations for additional Fed interest-rate cuts to support the economy. The result confirmed confidence in bets that short-maturity Treasuries, which are the most sensitive to the central bank’s policy, will outpace their longer-term counterparts this year, widening the yield gap between those maturities.
The steepener trade, as the position is dubbed, was one of the hottest bond strategies for much of 2025, drawing in fixed-income giant Pimco, among others, and it worked to start 2026 as well. The gap between two- and 10-year Treasury yields reached the largest in almost nine months last week.
“We’re longer-term investors, and over the next 12 to 24 months there’s a lot of scenarios where a steepener is going to work out well,” said Pramod Atluri, a fixed-income portfolio manager at Capital Group.
The jobs report capped an eventful stretch for the strategy. Traders were also on alert last Friday for a possible Supreme Court ruling on challenges to President Donald Trump’s tariffs. As it turned out, the court didn’t issue an opinion. But a potential decision against Trump is expected to put pressure on Treasuries given the revenue the levies generate. Investors also absorbed Trump’s request that Fannie Mae and Freddie Mac buy US$200 billion in mortgage bonds.
Inflation hurdle
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For data, the focus turns to Tuesday, with the release of December consumer-price figures. The report is projected to show that inflation remained elevated, backing the case for the Fed to pause.
After three rate cuts by the central bank since September, traders see the next reduction in mid-2026, with another to follow in the fourth quarter. Changing expectations around that timing will continue to buffet bets on a wider yield-curve gap.
For Subadra Rajappa, the head of US rates strategy at Societe Generale, momentum for the trade is waning.
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“I don’t see much room for the curve to continue to steepen,” she said. “A stable labour market and sticky inflation argue for fewer cuts.”
Of note, last Friday’s report also showed the jobless rate fell in December. That wiped out considerations of a rate cut this month and caused the curve wager to unwind some. The difference between 2- and 10-year yields shrank to its smallest since year-end.
Broadly speaking, however, it’s still a favored strategy for US bond managers. A JPMorgan Chase & Co analysis of the 25 largest active core bond funds shows that exposure to the position remains large from a historical perspective, although they’ve reduced some exposure since late last year.
Timing question
The question of timing is key, said Brian Quigley, a senior portfolio manager at Vanguard.
“We are pretty neutral on rates, and the only trade we have liked entering the year is a curve-steepener,” he said.
The money manager expected global investors to require higher yields on longer maturities at the start of the year given that there’s been a flood of bond sales. There’s also a combined US$61 billion of 10- and 30-year Treasury auctions ahead this week, which may weigh on those maturities.
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Capital Group’s Atluri, for his part, is positioning for a steeper curve by overweighting shorter maturities. He sees that approach panning out in any sort of broad “risk-off” move in credit or equities markets that leads traders to bet on deeper Fed cuts. It would also work if signs of healthy growth cause long-term yields to rise, or if deficit worries mount, he said.
Concerns around government spending will be on traders’ minds as they await the eventual release of the Supreme Court’s decision on tariffs. The court said Wednesday will be its next opinion day.
Some traders see a more complicated narrative around a ruling against the levies, beyond adding to angst around the risk of a swelling deficit that leads to heftier Treasury auctions.
John Brady, the managing director of RJ O’Brien, sees another angle emerging: that a lighter slate of tariffs initially reduces worries that the levies will fuel inflation. That interpretation could support longer maturities and dash bets on a wider yield-curve gap.
However, even that view has a flip side.
After all, Fed chair Jerome Powell’s term ends in May, and investors are eyeing the prospect that Trump chooses a successor who may be more inclined to ease rates faster, especially if inflation is cooling.
“The market will likely price in a third rate cut this year” in that scenario, said Tony Rodriguez, the head of fixed-income strategy at Nuveen.
Uploaded by Isabelle Francis
