Treasury Yields Advance as Jobless Tally Cast Doubt on Fed Rate Cuts

Short-term US Treasury yields climbed after fresh evidence of labor-market resilience chipped away at expectations for Federal Reserve interest-rate cuts later this year. The move underscores how sensitive bond markets remain to even modest shifts in economic data tied to employment.

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The catalyst was an unexpected decline in weekly US jobless claims, which fell below every forecast in a survey of economists. The surprise drop reinforced the view that the labor market remains sturdy, giving the Fed room to pause further rate cuts this month and potentially delay any additional easing until the middle of the year.

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Treasury yields in the two- to five-year range which tend to react most sharply to changes in monetary policy were holding roughly three basis points higher on the day after retreating from earlier highs. In response, bond traders scaled back bets on a rate cut by midyear and reduced expectations for a second cut before year-end, even as markets continue to largely price in both outcomes.

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According to Jordan Rochester, head of macro strategy at Mizuho in London, the latest data supports a growing narrative that rate cuts may be delayed until there is a change in Fed leadership. Chair Jerome Powell’s term is set to expire in May, and President Donald Trump has indicated he intends to appoint a successor aligned with his push for lower borrowing costs.

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Treasury yields were already rebounding from levels reached during a global bond rally, sparked in part by a surge in UK government bonds and a steep drop of more than 4% in crude oil prices. That energy move came as concerns over potential US military action against Iran eased, reducing demand for traditional safe-haven assets.

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At the front end of the curve, two-year Treasury yields rose as much as four basis points to around 3.5%. Longer-dated bonds saw more muted moves, with yields on 10- to 30-year maturities climbing less and pulling back more sharply from their intraday highs. This divergence caused the yield curve to flatten slightly as the spread between short- and long-term yields narrowed.

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Several major Wall Street firms, including JPMorgan Chase & Co. and TD Securities, are positioning for further strength in short-term yields relative to longer maturities. The strategy reflects expectations that the Fed will keep policy rates higher for longer than markets previously assumed. Notably, this positioning runs counter to one of the most crowded bond trades over the past year the expectation that the yield curve would steepen as rate cuts accelerated.

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The Fed has already reduced interest rates three times since September in response to signs of cooling in the labor market. Those decisions have not been without controversy, as inflation remains above the central bank’s 2% target. In December, two Fed officials dissented against the rate cut, preferring no change, while another argued for a more aggressive reduction.

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Recent data have sent mixed signals. A softer-than-expected inflation report earlier this week helped revive confidence that the Fed still intends to ease policy. At the same time, a larger-than-anticipated drop in the unemployment rate in December highlighted ongoing strength in hiring conditions. Together, these developments have reinforced expectations for two rate cuts this year though most investors now believe those moves will come only after Powell steps down.

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Over the past week, several major banks, including Morgan Stanley, Barclays, and Citigroup, have pushed back their timelines for Fed rate cuts, shifting expectations deeper into 2026. JPMorgan’s economists and strategists have gone even further, saying they no longer anticipate any rate reductions this year and instead see the possibility of a rate hike in 2026.

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Comments from Fed officials have echoed that cautious stance. Atlanta Fed President Raphael Bostic said Thursday that monetary policy needs to remain restrictive, given that inflation is still running too hot. Meanwhile, Chicago Fed President Austan Goolsbee told CNBC that bringing inflation back to target remains the central bank’s top priority, though he added that rates could eventually move lower if price pressures continue to ease in a sustained way.

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For investors, the takeaway is clear: while markets still expect eventual rate cuts, the timing is becoming increasingly uncertain. Strong labor data and persistent inflation are forcing traders to reassess assumptions, keeping short-term yields elevated and reinforcing volatility across the Treasury curve.

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