US Treasury yields rose across the curve on Wednesday. The 10-year note reversed earlier falls after firm US data increased the chance of interest rates staying unchanged this year.
March ADP Employment Change was 62K, above forecasts of 40K, but 4K below February. February Retail Sales rose 0.6% month on month, beating forecasts of 0.5% and reversing January’s -0.1%.
US manufacturing expanded in March, based on the ISM survey. The prices-paid measure for factory inputs reached its highest level in almost four years.
Federal Reserve officials restated the aim of moving inflation towards 2%. Michael Barr said more work is needed, Thomas Barkin said rising inflation expectations would warrant action, and Alberto Musalem said policy is “well positioned” near the low end of neutral, while noting supply shocks pose inflation risks.
The US Dollar Index fell 0.27% to 99.58. Five-year breakeven inflation expectations were 2.54%, down from 2.57%, and the 10-year breakeven rate edged down from 2.31% to 2.3%.
Initial Jobless Claims and further Fed speeches are due on Thursday. Focus then shifts to March Nonfarm Payrolls on Friday, during a US holiday.
From the perspective of 2025, the economic data showed unexpected strength, justifying the Federal Reserve’s decision to maintain high interest rates throughout that year. We saw both employment and retail sales figures exceed forecasts, which meant that bets on early rate cuts were misplaced. This environment favored traders who were positioned for a prolonged period of policy restriction.
Today, the picture is much different, and our strategy must adapt. The labor market is showing signs of cooling, with the latest March 2026 ADP employment report coming in at 150,000, just shy of the 165,000 consensus. This contrasts sharply with the surprising strength we observed a year ago.
The high factory input prices that concerned officials in 2025 have since moderated significantly, with the latest Core PCE inflation data for February 2026 registering at 2.3%, much closer to the Fed’s target. Consequently, Fed commentary has pivoted from fighting inflation to discussing the timing of potential rate cuts later this year. This makes options that bet on lower interest rates, such as SOFR futures puts or Treasury call options, more compelling.
This policy shift is reflected in Treasury yields, with the 10-year note currently trading around 3.85%, a stark contrast to the upward pressure we saw in 2025. Inflation expectations have also anchored, as the 10-year breakeven rate holds steady near 2.25%, below the 2.3% levels seen a year ago. This suggests the market believes the Fed has successfully controlled long-term price pressures.
Given the uncertainty around the exact timing of the first rate cut, we should anticipate increased volatility in interest rate markets. Derivative strategies that profit from price swings, like straddles on Treasury bond ETFs, could be advantageous in the coming weeks. Upcoming data, particularly the next Nonfarm Payrolls and CPI reports, will be critical in shaping expectations and should be watched closely.
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