Bond investors are increasingly wagering on the Federal Reserve’s future path, particularly concerning the Treasuries market in 2026. A recent employment report revealed that job growth fell short of expectations, reinforcing predictions of further interest rate cuts by the Fed to bolster the US economy. This outcome has solidified confidence in bets that short-maturity Treasuries, which are highly sensitive to central bank policy, will outperform their longer-term counterparts this year, thus widening the yield gap between these maturities.
The ‘steepener trade,’ as the strategy is known, gained traction last year and has continued into 2026. This involves profiting from the difference between short-term and long-term bond yields. The gap between two- and 10-year Treasury yields reached its widest point in nearly nine months recently, highlighting the strategy’s potential. Capital Group is an investment management company that manages assets for individuals and institutions. They offer a range of investment products, including equities, fixed income, and multi-asset solutions.
The recent jobs report has significantly impacted the strategy. Traders were also closely monitoring a potential Supreme Court ruling on challenges to President Donald Trump’s tariffs. A decision against Trump is anticipated to put downward pressure on Treasuries, considering the revenue generated by these levies.
Additionally, investors are considering Trump’s proposal for Fannie Mae and Freddie Mac to purchase $US200 billion in mortgage bonds, adding another layer of complexity to the market dynamics. These factors collectively contribute to the evolving landscape for bond investors and the steepener trade’s prospects.
