Yields Tread Water as Traders Squint at the Economy and a Warsh-led Fed Shakeup

CNBC, Bloomberg, Reuters, and Market Watch contributed to this report.

US Treasury yields barely budged Friday as investors took stock of mixed economic signals and waited for a string of delayed data that could move markets next week.

The day’s movers were tiny: the 10-year yield ticked up less than 1 basis point to about 4.216%, the 30-year sat roughly flat at 4.863%, and the 2-year climbed a hair above 3.498%. (Reminder: one basis point = 0.01% — and yields and bond prices move in opposite directions.)

A few things are keeping everyone on their toes. Consumer sentiment surprised to the upside: the preliminary University of Michigan reading for February came in at 57.3, up 1.6% from January and well above economists’ 55.0 forecast. But that came after a soft ADP private-payrolls print and data showing job openings in December fell to their lowest level since September 2020 — signs the labour market might be losing steam.

Crucially, two market-moving reports were pushed back by the recent brief government shutdown: January’s nonfarm payrolls are now due Feb. 11 (economists expect about 60,000 new jobs and a steady 4.4% unemployment rate), and the January consumer price index is slated for Feb. 13. With those reports delayed, traders are trading on crumbs and expectations rather than fresh, solid macro prints.

Investors are increasingly pricing in a steeper yield curve and higher long-dated Treasury yields next year as they eye the likely policy tilt under incoming Fed chair Kevin Warsh. Here’s the logic: Warsh is expected to push for near-term rate cuts while also shrinking the Fed’s roughly $6.6 trillion balance sheet. Shrinking that balance sheet reduces the Fed’s reinvestments in Treasuries, effectively putting more supply into the market — and more supply tends to nudge long-term yields up, steepening the curve.

“That combination — cutting rates but tightening the balance sheet — sends yields in opposite directions,” said a fixed-income strategist.

In plain English: you’re trying to be dovish on short rates while removing demand for long bonds, which can push long yields higher and ramp up volatility.

Futures and swaps still price in a couple of quarter-point rate cuts this year (with the first one pencilled in for mid-June), but many bond pros warn about the awkward mechanics of doing both cuts and balance-sheet shrinkage at once. Technical and regulatory quirks mean reducing Fed assets is complicated and could take time — and that leaves the door open for bouts of rate volatility.

Traders are watching term premium and curve moves carefully. Even before Warsh’s nomination, the curve was steepening on inflation and higher deficit worries, and a smaller Fed footprint would likely accentuate that trend.

Bonds were quiet on Friday, but the calm feels temporary. With key jobs and inflation reports delayed, traders are betting on policy, not data — and the policy puzzle around balance-sheet rolloff plus potential rate cuts is exactly the kind of thing that can send the long end of the market spiking. So yes: yields were little changed today, but investors are bracing for a noisier, bumpier road ahead.