TREASURY WRAP: T-NOTE FUTURES (H6) SETTLE 7+ TICKS LOWER AT 112-06+

TREASURY WRAP: T-NOTE FUTURES (H6) SETTLE 7+ TICKS LOWER AT 112-06+

• U.S. Treasury yields rose across the curve as traders anticipate potential volatility from upcoming Fed Chair selection and December jobs report.
• Market participants are pricing in over 50 basis points of easing for 2026, with varied expectations on Fed rate cuts.
• Corporate issuance is expected to resume as the New Year begins, potentially impacting bond markets.

U.S. Treasury yields experienced a bear steepening on the first trading day of 2026, with the market largely quiet ahead of a potentially volatile week. The 10-year Treasury yield rose by 4.1 basis points to 4.191%, while the 30-year yield increased by 3.5 basis points to 4.865%. This movement comes as traders prepare for significant events that could influence market dynamics, including the selection of a new Federal Reserve Chair and the release of the December jobs report.

The potential appointment of a new Fed Chair is a focal point for market participants, with the odds of Kevin Hassett taking the position easing to 42%, followed by Kevin Warsh at 34%, and Christopher Waller at 13%. The choice of Fed Chair is crucial as it could signal the future direction of monetary policy, particularly in light of current market pricing, which anticipates over 50 basis points of easing for 2026. This expectation exceeds the Fed's median projection of just one rate cut this year, reflecting a market sentiment that leans towards a more dovish Fed leadership.

The upcoming December jobs report is another key event that traders are closely monitoring. The data will provide insights into the labour market's health and could influence expectations for Fed rate cuts. Currently, market-implied pricing suggests a gradual easing, with 3 basis points expected in January, 12 basis points in March, 18 basis points in April, and a significant 56.5 basis points by December.

In addition to these macroeconomic factors, the market is also anticipating a return of corporate bond issuance as the New Year begins and the holiday season concludes. This could lead to increased activity in the bond markets, with potential implications for yields and investor positioning.

The New York Federal Reserve's reverse repurchase agreement (RRP) operation demand dropped significantly to USD 5.67 billion from the previous USD 106 billion, indicating a shift in liquidity dynamics. Meanwhile, the Effective Federal Funds Rate (EFFR) remained steady at 3.64%, with volumes at USD 74 billion, and the Secured Overnight Financing Rate (SOFR) rose to 3.87% with volumes at USD 3.458 trillion.

Trader Insight:

• Some traders may consider monitoring the US 10-Year Treasury yield for potential shifts in response to the Fed Chair announcement and jobs report.
• Market participants are watching bond ETFs like TLT for signs of volatility as corporate issuance resumes.
• Analysts note that traders are assessing risk in USD/JPY amid expectations of Fed policy changes.
• Observers are considering exposure to financial sector ETFs, such as XLF, given the potential impact of monetary policy shifts on banking stocks.

Disclaimer: This is not trading advice. For informational purposes only.