The bond market is currently facing challenges, with a notable contrast between rising UMich inflation expectations and decreasing market-based expectations. This disparity may reflect concerns regarding slowing growth amid recent tariffs and possible missteps by the administration.
US 10-year yields have increased by 18 basis points to 4.57%, which is higher than levels seen during the previous administration’s tariff removals. This shift suggests that the market perceives the current fiscal outlook as troubling.
Significance Of Treasury Yields
While the discrepancy between consumer-based and market-based inflation indicators draws attention, the recent increase in Treasury yields offers a more telling signal. Investors appear to be adapting quickly to economic uncertainty, possibly assuming the Federal Reserve will have little room to manoeuvre if growth weakens more noticeably.
Consumer surveys, such as those from the University of Michigan, have shown that expectations of higher prices remain firm among households. In contrast, the market’s own readings, including breakeven inflation rates and swaps, point in a softer direction. This divide shouldn’t be dismissed as noise. Instead, it suggests that confidence in the policy trajectory is beginning to fragment.
Yields, particularly on the long end of the curve, are moving higher not just because of shifting inflation expectations but because of growing concerns surrounding government debt issuance and fiscal restraint, or lack thereof. With the 10-year yield near levels not touched since early last year, it’s becoming harder to argue that pricing merely reflects economic strength. BlackRock’s Rieder recently noted that the structure of the yield curve no longer mirrors classic growth cycles—this sentiment is now being echoed more broadly in credit markets too.
We have seen credit spreads react tentatively, not widening aggressively but hesitating. That often happens when the rate move is as much about policy confusion as it is about cyclical momentum. Bond volatility, as measured by the MOVE index, has quietly firmed up. This often points to increased hedging activity or unwillingness among institutional traders to sell volatility outright. Instead, we’ve noticed a preference to stay more neutral or even skewed towards owning optionality.
Market Trading Strategies
For us, this raises the question of how to approach rate exposure. Replying with a broad-based flattening bias is becoming less effective. A more targeted view is needed—aiming short-duration hedges where funding instability appears most exposed, and being aware of duration risk where large fiscal outlays could lead positioning to crowd. The Treasury department’s quarterly refunding statement next month could add further sensitivity if the issuance mix leans towards longer maturities. In this setup, calendar events carry weight not through their unexpectedness, but in how they reinforce ongoing anxieties.
Housing and construction data are also beginning to reflect rate sensitivity more clearly. The NAHB builder confidence index, recently slipping, tells us that higher mortgage rates are finally starting to bite. This again loops back to asymmetric risk around inflation expectations stabilising while yields drift upwards—potentially indicating that term premiums are rising, which in turn reflects uncertainty, not just bullish growth assumptions.
If term premiums are indeed driving these moves, then being wrong on growth doesn’t provide the same cushion it once did. That’s important. It implies traders should favour spreads that benefit from volatility returning rather than those that hope for a swift reversion to the old playbook.
We should be thinking harder about how the forward curve is priced. Implied terminal rate levels are stable, but their path still lacks conviction. If the market becomes more reactive to data swings, then short-dated options could offer better risk-return than outright positions. That’s especially true heading into the next CPI or employment release.
Moreover, hedging flows around auctions are likely to increase. As net supply rises, primary dealers may need to hold more inventory. That makes price action around those events less predictable—and more prone to sharp reversals. So exposure around auction days may need to be trimmed or held with tactical protection.
We’ve also seen elevated dealer gamma positioning further complicating clean directional trades. When gamma is short across the curve, intraday swings often deepen—which can trigger stops even when overall the trade idea is well-founded. These technical factors shouldn’t be ignored.
Approaching the coming weeks with this in mind means tilting towards relative value trades that can outperform even in choppy rangebound conditions, especially those with defined downside. There are better levels now for implementing trades that benefit from rate volatility or kink shifts in the curve. The challenge is execution discipline.
We continue to monitor movements in liquidity metrics. On days when bid-ask spreads widen in futures, it’s often a sign that asset managers are rotating or reallocating risk. These moments tend to offer opportunity, but require speed. So keeping optionality live in the book remains a theme.
