US Treasury yields fell across the curve. The 10-year note dropped nearly six basis points to 4.141%. The 10-year yield is on track for a fourth straight day of declines. The move followed weaker US economic data.

Cooling Data Drives Rate Cut Expectations

US Retail Sales in December were flat at 0% and came in below estimates. The Employment Cost Index for Q4 2025 rose 0.7% quarter-on-quarter, down from 0.8% in Q3 and below forecasts. After the data, money markets priced in 58 basis points of rate cuts, based on Chicago Board of Trade data. Comments from regional Fed presidents Lorie Logan and Beth Hammack did not push yields higher, and they helped limit losses in the US dollar. The US Dollar Index was 96.84, unchanged. Five-year inflation expectations were 2.5% based on the 5-year breakeven rate, while the 10-year breakeven rose to 2.35%. Focus is now turning to January US Nonfarm Payrolls, due on Wednesday. Forecasts call for 70K job gains versus 50K in December, with the unemployment rate expected to hold at 4.4%.

Positioning For Further Rate Declines

We saw this trend strengthen late last year as soft economic data kept coming in. The weak December 2025 retail sales report and the softer Employment Cost Index both point to a cooling economy. This supports our view that the Federal Reserve may need to restart its easing cycle. January’s Nonfarm Payrolls report added to that view, with job gains of 60,000, below expectations. This suggests the labor market is slowing, which pushed the 10-year Treasury yield down toward 4.05% in the first week of February. The dollar also weakened, with the DXY now near 96.10. With this backdrop, we expect rates to face more downward pressure in the coming weeks. Strategies such as buying calls on Treasury note futures, or using interest rate swaps to receive floating and pay fixed, may benefit from falling yields. Recent inflation data also supports this view. January’s Consumer Price Index, released this week, showed inflation of 2.6% year-over-year, below the 2.8% consensus forecast. That gives the Fed more room to cut rates without a sharp rise in inflation. This looks similar to mid-2019, when weakening global data led the Fed to shift from tightening to easing. History shows that once this shift starts, markets often price in cuts faster than the Fed first signals. We see a similar pattern forming now. Uncertainty about the timing of the first cut has also lifted bond market volatility. The MOVE Index has risen from the low 80s to around 98 over the past month. That means options markets are pricing in bigger swings in Treasury yields. One way to take advantage of this higher volatility is to sell out-of-the-money puts on Treasury futures to collect premium. Looking ahead, the March Fed meeting is the next key event. CME FedWatch Tool data shows the market is pricing in an 80% chance of a 25-basis-point cut at that meeting. Until then, each new data release will be judged by whether it supports—or challenges—that expectation. Create your live VT Markets account and start trading now.

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