Bond Traders’ Big Bet For 2026 Vindicated By Soft US Job Growth

Bond investors’ overarching wager on the path of the Federal Reserve and the Treasuries market in 2026 looks like it has room to run.

A much-anticipated employment report on 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

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 2- and 10-year Treasury yields reached the largest in almost nine months last week.

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“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.

Impact of US Job Growth on Bond Market

The jobs report capped an eventful stretch for the strategy. Traders were also on alert 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 $200 billion in mortgage bonds.

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Upcoming Economic Data

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.

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Expert Analysis

For Subadra Rajappa, head of US rates strategy at Societe Generale, momentum for the trade is waning.

“I don’t see much room for the curve to continue to steepen,” she said. “A stable labor market and sticky inflation argue for fewer cuts.”

Of note, 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.

Indian Investors’ Perspective

For Indian investors looking to invest in the US bond market, it’s essential to understand the implications of the Federal Reserve’s decisions on the bond market.

The question of timing is key, said Brian Quigley, 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 $61 billion of 10- and 30-year Treasury auctions ahead this week, which may weigh on those maturities.

Conclusion

In conclusion, the bond market is expected to remain volatile in 2026, with the Federal Reserve’s decisions playing a crucial role in shaping the market. Indian investors looking to invest in the US bond market must stay informed about the latest developments and trends.

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