US Jobs Data Fuels Bond Traders' 2026 Steepener Bet Vindication

Weak U.S. job growth reported Friday has validated a key strategy for bond investors heading into 2026, reinforcing expectations for Federal Reserve interest-rate cuts and widening the yield gap between short and long-term Treasuries.

Jobs Report Fuels Steepener Trade

The latest employment figures showed job creation fell short of forecasts, bolstering the conviction behind the "steepener" trade. This strategy bets on short-maturity Treasuries outperforming longer-dated ones, as they are more sensitive to the central bank's monetary policy. The gap between 2- and 10-year Treasury yields recently reached its widest point in nearly nine months, demonstrating the trade's momentum. Major fixed-income players like Pimco had already embraced this position throughout 2025.

Inflation and Fed Watch

Attention now shifts to upcoming inflation data, specifically the December consumer-price index, projected to show elevated levels. This would typically support the Fed's case for maintaining its current policy stance. However, traders anticipate further rate cuts beyond the three already implemented since September, with expectations for reductions in mid-2026 and the fourth quarter. Shifts in these timing expectations will continue to influence yield-curve bets.

Conflicting Signals and Future Bets

Despite the overall trend, recent data points have introduced complexity. Friday's report also noted a fall in the jobless rate, which momentarily pared back expectations for an immediate rate cut. Analysts like Subadra Rajappa of Societe Generale suggest the curve may have limited room to steepen further, citing a stable labor market and persistent inflation as arguments against aggressive Fed easing. JPMorgan Chase & Co. data indicates that while bond managers still favor the steepener, they have moderately reduced their exposure from late last year.

Broader Market Considerations

Beyond economic data, market participants are monitoring potential Supreme Court rulings on tariffs and the Treasury Secretary's requests regarding mortgage bonds. A ruling against tariffs could increase deficit concerns, potentially pressuring Treasuries. Conversely, some argue it could ease inflation fears, supporting longer maturities. The upcoming auctions for $61 billion in 10- and 30-year Treasuries this week also loom, potentially weighing on those specific maturities. Portfolio managers remain positioned for curve steepening, anticipating that any broader market risk-off sentiment or deficit worries could drive deeper Fed easing.