US employment growth slows down, bond market "steepening trades" regain attention

Source: BlockMedia Original Title: US Employment Slowdown Confirmed…Bond Market ‘Steepener Trade’ Gains Momentum Again Original Link: The slowdown in US employment growth has been confirmed, and expectations for the Federal Reserve to further cut interest rates are rising, which has fueled the anticipation of an expanding gap between short-term and long-term interest rates in the bond market.

According to the latest data, the number of new jobs added in December in the US did not meet market expectations, and the market generally views this as a sign of slowing economic growth. Against this backdrop, expectations that the Fed will cut rates again to stimulate the economy have increased, boosting demand for rate-sensitive short-term government bonds, leading to the largest gap between 2-year and 10-year US Treasury yields in about nine months.

Short-term interest rates decline, long-term rates remain stable

The trading strategy targeting the widening of the interest rate spread is called a “steepening trade” in the market. During a rate-cutting cycle, short-term interest rates typically fall quickly, while long-term rates stay relatively high. This strategy became one of the most popular bond market trades in 2025, with large institutional investors such as global bond funds actively participating.

A portfolio manager at Capital Group stated, “The scenario where the yield curve may further steepen over the next 12 to 24 months still exists,” and “steepening strategies can be effective in various environments.”

Unemployment rate declines, inflation variables… trading faces adjustments

However, the signals from this employment data are not straightforward. Although the growth rate of new jobs has slowed, the unemployment rate has actually decreased, which weakens the view of a sharp deterioration in the labor market. Therefore, the possibility of a rate cut in January has essentially disappeared, and some steepening positions have experienced short-term corrections.

Market focus has shifted to inflation data. The market generally expects the December Consumer Price Index (CPI) to still show high inflation. If inflation pressures remain difficult to ease, the Fed may temporarily keep interest rates unchanged and maintain a cautious stance. Currently, the bond market believes that after three rate cuts since September last year, the next rate cut could occur in mid-2026, with further cuts possible by the end of the year.

An analyst at a major investment bank specializing in US interest rate strategy said, “Considering the stability of the labor market and sticky inflation, the room for further steepening of the yield curve may be limited,” and “the Fed’s rate cuts may also be smaller than market expectations.”

Nevertheless, overall interest in the steepening trade in the bond market has not cooled. Results from JPMorgan analyzing major active bond funds show that, although there have been some recent position adjustments, bets on the widening of the short-term and long-term interest rate gap remain above historical averages.

Treasury supply and policy uncertainty will determine the next quarter

Key variables include Treasury supply and policy uncertainty. This week, the planned auction sizes for 10-year and 30-year US Treasuries total $61 billion, which could put pressure on long-term interest rates. Additionally, judicial rulings on tariff policies and the potential expansion of fiscal spending could also increase bond market volatility.

A senior portfolio manager at a large asset management firm said, “As of the beginning of the year, the most popular trade is the steepening of the yield curve,” and “In an environment with large Treasury issuance, long-term bonds may require higher yields as compensation.”

The market generally believes that the combined effects of slowing employment growth, inflation pressures, and expanding Treasury supply will lead to continued uncertainty in the Fed’s interest rate policy path through 2026. However, currently, most bond investors still consider bets on the re-expansion of the long-short interest rate spread to be valid.