US Treasury yields fell across the curve. The 10-year note dropped nearly six basis points to 4.141%.
The 10-year yield is set for a fourth straight day of declines. This followed weaker US economic data.
Cooling Data Drives Rate Cut Expectations
US Retail Sales in December were unchanged at 0% and missed estimates. The Employment Cost Index for Q4 2025 rose 0.7% quarter-on-quarter, down from 0.8% in Q3 and below forecasts.
After the releases, money markets priced in 58 basis points of easing, based on Chicago Board of Trade data. Comments from regional Fed presidents Lorie Logan and Beth Hammack did not lift yields, and limited US dollar losses.
The US Dollar Index was 96.84, unchanged. Five-year inflation expectations were 2.5% via the 5-year breakeven rate, while the 10-year breakeven rose to 2.35%.
Attention is turning to January US Nonfarm Payrolls due on Wednesday. Forecasts are for 70K job gains versus 50K in December, with unemployment expected to stay at 4.4%.
Positioning For Further Rate Declines
We saw the trend solidify late last year as soft economic data began piling up. The miss in December 2025’s retail sales and the lower-than-expected Employment Cost Index confirmed a cooling economy. This reinforced our view that the Federal Reserve would be forced to resume its easing cycle.
The subsequent Nonfarm Payrolls report for January further cemented this outlook, coming in at a weaker-than-expected 60,000 jobs. This miss confirmed that the labor market is losing momentum, pushing the 10-year Treasury yield down further to near 4.05% in the first week of February. The dollar has also weakened, with the DXY now trading around 96.10.
Given this data, we should position for continued downward pressure on interest rates in the coming weeks. Strategies like buying calls on Treasury note futures or entering interest rate swaps to receive a floating rate and pay a fixed rate look attractive. These derivatives directly profit from falling yields.
The most recent inflation data adds fuel to this fire. The Consumer Price Index for January, released just this week, showed a year-over-year increase of only 2.6%, missing the consensus forecast of 2.8%. This gives the Fed significant room to cut rates without worrying about reigniting inflation.
This market action is reminiscent of what we observed in mid-2019, when a string of weakening global data prompted the Fed to pivot from a tightening to an easing stance. History suggests that once this momentum begins, the market tends to price in cuts more aggressively than the Fed initially signals. We see a similar pattern unfolding now.
Uncertainty around the timing of the first cut has pushed bond market volatility higher. The MOVE Index has climbed from the low 80s to around 98 in the last month, indicating that options are pricing in larger swings in Treasury yields. Selling some out-of-the-money puts on Treasury futures could be a way to collect premium from this elevated volatility.
Looking ahead, all eyes are on the upcoming March Fed meeting. According to CME FedWatch Tool data, the market is now pricing in an 80% chance of a 25-basis-point rate cut at that meeting. Any data that comes out between now and then will be viewed through the lens of whether it confirms or denies this strong market expectation.
