Traders Bet on Fewer 2026 Rate Cuts After Strong Labor Data

Miles J. Herszenhorn and Ye Xie

Thu, February 12, 2026 at 5:19 AM GMT+9 4 min read

Photographer: Yuki Iwamura/Bloomberg

(Bloomberg) – A strong US employment report caught investors in the $30 trillion Treasury bond market off guard, sending yields surging as traders lowered their expectations for Federal Reserve interest-rate cuts this year.

Yields on two-year notes — which are most sensitive to the central bank’s policy changes — jumped as much as 9.5 basis points to 3.55%, then eased back to 3.5% by the end of Wednesday’s trading session. Benchmark 10-year yields rose three basis points to 4.17% after a $42 billion auction of the securities saw demand fall short of expectations.

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Traders had been bracing for a weak report based on other labor-market indicators and predictions of slower job growth in comments this week by two US administration officials. After the data they began pricing in the Fed’s next rate reduction in July, versus June previously. Those meetings fall after Fed Chair Jerome Powell’s term ends in May.

“The market came into this expecting a weak number and got the opposite,” said John Briggs, head of US rates strategy at Natixis. “As for market pricing of cuts, it’s falling as one would expect given the Fed’s focus on the labor market.”

Interest-rate swaps after the data showed traders see less than a 5% chance that policymakers lower rates when they meet in March. A total of 52 basis points of easing were priced in by December, compared with 59 basis points on Tuesday.

In listed interest-rate options, flows tied to the Secured Overnight Financing Rate were consistent with liquidation of hedges that targeted Fed rate cuts during the first half of this year. SOFR is a market rate that’s guided by the Fed’s policy rate.

The jobs report showed nonfarm payrolls increased 130,000 last month, about double the median estimate of economists surveyed by Bloomberg. The unemployment rate unexpectedly fell to 4.3% from 4.4%.

The strong readings invited speculation into how Kevin Warsh, President Donald Trump’s pick to become the next Fed chair, will handle policy.

Warsh, who needs Senate confirmation to succeed Powell, “might have a harder time convincing the hawks to vote for cuts, if that is in fact his bias,” said Subadra Rajappa, a strategist at Societe Generale. “The strong headline and uptick in wages argues for a more cautious approach to policy.”

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Trump — who has been pressuring the Fed to lower borrowing costs — called the job report “great” on social media and said the US “should be paying MUCH LESS on its Borrowings (BONDS!).” He wrote that the US could save $1 trillion a year in interest cost, leading to a balanced budget. Interest expense on the debt in fiscal 2025 was $1.22 trillion.

On Wednesday, the Congressional Budget Office jacked up its estimate of deficits for the coming decade by $1.4 trillion, citing Trump’s 2025 tax law and immigration policies.

‘No Rush’

Overall, the jobs report — whose release was delayed by several days due to a US government shutdown — lent support to Fed officials who want to hold rates steady after three cuts last year to shore up the labor market. The December cut faced resistance from several policymakers who want to see inflation cool further.

Kansas City Fed President Jeff Schmid said on Wednesday that the central bank should hold rates at a “somewhat restrictive” level because inflation remains too high. On Tuesday, Cleveland Fed President Beth Hammack, who was critical of the December cut and, unlike Schmid, votes on policy decisions this year, said interest rates could be on an extended hold while officials evaluate incoming economic data.

The January consumer price index, a US inflation gauge to be released Friday, is forecast to show increases of 0.3% overall and excluding food and energy, with year-on-year rates easing to 2.5%, according to economists surveyed by Bloomberg.

Several Wall Street banks that had predicted a Fed rate cut in March abandoned that call. CIBC Capital Markets now expects two reductions this year, in June and July, rather than in March and June. Economists at TD Securities pushed back their call for the next cut to June, from March. And Citigroup Inc. sees moves in April, July and September.

The data “suggests that the Fed remains in no rush to cut interest rates in the near-term,” said Gennadiy Goldberg, head of US interest-rates strategy at TD Securities. Still, “markets will struggle to price out all cuts this year as we believe the stronger reading signals a delay of cuts, rather than the Fed unlikely to cut this year.”

Goldberg expects this to keep 10-year Treasury yields between 4.10% and 4.30%, where they’ve been since December.

–With assistance from Michael MacKenzie, Carter Johnson and Kristine Aquino.

(Adds US interest expense and updates yield levels.)

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