I don’t know how many market participants had “bear flattener” on their jobs day bingo card, but by midday in the US, the front-end bore the brunt of the rates fallout from another strong payrolls update.

A very warm read on longer run inflation expectations in the preliminary University of Michigan sentiment release for January offered another excuse for traders to trim bets on additional Fed cuts in 2025.

By noon, the 2s10s was ~4bps flatter, and the 2s30s ~7bps. Pricing for 2025 Fed easing was inside of 30bps.

As the figure shows, we’re one “hawkish” session (which is to say one hot CPI report) away from traders fading any Fed cuts this year.

The more pronounced reaction at the front-end, when juxtaposed with 30-year yields which were up a comparatively tame 3.5bps midday after breaching 5% earlier in the session, is a testament to the notion that a Fed with its hands tied is a Fed that can’t respond aggressively to a sudden deterioration in the growth outlook.

Read that again, and then use it as a lens through which to interpret the price action. When you see 2s at session lows (session high yields) with 10s and out off the lows (and off the yield highs), the implication is that some market participants are reading the tea leaves for an economy which, by the looks of things, can’t count on additional Fed cuts between now and mid-year.

It’s not just dip-buying at 5% on the long bond (and/or 4.75% on 10s). Or if it is, it’s dip-buying motivated in part by the suspicion that the Fed’s going to run out of luck eventually with “higher-for-longer.” Having been fooled again now by the labor market, policymakers may be reluctant to restart cuts, raising the odds of a fashionably late hard landing.

The figure shows you how the mode of the curve suddenly shifted in the wake of payrolls and the University of Michigan inflation expectations overshoot.

Until Friday, 2025 was defined by a bear steepener, as fiscal fretting and assumptions about a robust US economy outweighed expectations for firmer front-end rates. Following Friday’s data, the zeitgeist shifted a bit, such that markets are now focused on the read-through of what’ll likely be a recalcitrant, jaded FOMC in the event growth were to suddenly sputter.

In some ways, this is the worst of all possible worlds for stocks. Long-end yields didn’t fall on Friday, they just rose less than yields on shorter-dated obligations. So, you still had the pressure on rich valuations from high (and rising) long-end yields, but you also had a sharp hawkish repricing at the front-end, which is just outright bearish for risk.