Right after the Fed announced that quarter-point cut last week, I noticed something strange.
The move itself wasn’t surprising because the market had already priced it in.
What stood out was the reaction in the Treasury market.
Instead of short-term yields falling, like you’d normally expect after a cut, the 2-year actually moved higher.
That’s not how this usually plays out.
It tells me the bond market isn’t buying the idea that this is the start of a true easing cycle.
In fact, it’s sending the opposite message — that inflation’s still sticky, the Fed’s not done fighting, and more uncertainty is ahead.
Let’s break down why yields are acting upside-down right now, and what this week’s key economic reports could do to shake things up again.
Baby Steps
The Fed did what we thought it would and cut rates by 0.25%, but Chair Jerome Powell wasn’t exactly waving the all-clear flag.
He called the move a “risk management cut,” which is Fed-speak for, “We’re not panicking, but we’re getting a little nervous.”
Translation: They’re easing a bit because growth is cooling and inflation hasn’t fully broken, but they’re still walking that tightrope between too hot and too cold.
They’re not sprinting to the bottom here.
That’s why the shorter-term yields didn’t fall like some expected.
The bond market heard Powell loud and clear: This isn’t the start of an aggressive easing cycle.
It’s more of a hedge, a toe in the water.
And then the longer end of the curve started rising too. On Friday, the 10-year Treasury gained more than 3.1 basis points and the 30-year, 2.7 bps.
Now, that move makes more sense.
If the Fed is going to be cautious and inflation is still hanging around, investors are going to demand more compensation to hold longer-dated bonds.
That’s the market saying, “If you’re not serious about cutting yet, we’re not buying your ‘disinflation’ story.”
So we’re getting this strange picture right now where the Fed is cutting, but yields are rising — especially on the long end.
Which means the curve is starting to re-steepen again.
That re-steepening is the bond market telling you something else: The Fed may be behind the eightball again.
Watch the Stats
And here’s where it gets interesting…
Later this week, we’ve got two heavyweight data points hitting the tape:
1. Jobless claims – Thursday morning. This report will give a fresh read on whether the labor market is cracking or just softening. Remember, the Fed is watching this very closely. Rising claims = more pressure to cut. Flat or falling = more runway to hold rates where they are.
2. PCE inflation – Friday morning. This is the big one. Core PCE is the Fed’s favorite inflation measure. If this number comes in hot — meaning inflation isn’t cooling fast enough — you can forget about a steady stream of rate cuts. The long end of the curve could pop again, fast.
On the flip side, if that number shows real progress — if we’re inching closer to the Fed’s 2% goal — then short-term yields might finally start to fall.
That would tell us the Fed might actually start to follow through with cuts.
So, the table is set.
The market’s jittery and bond traders are on edge.
Here’s the Strategy
From a trading perspective, here’s what I’m watching:
If PCE comes in cool and jobless claims tick up, expect short yields to dip, maybe fast. That’s when I’d be looking at longer-duration plays with leverage to falling yields.
But if PCE is sticky and claims hold steady, you might want to start looking at put spreads on the same kinds of names. Because this idea of “higher for longer” will take root again, and those long bonds will feel the heat.
Bottom line: This rate cut didn’t give us the green light. It gave us a clue.
But the real story gets written a little later this week, when the data hits.
That’s when we’ll know if the bond market is bluffing or if it’s front-running the Fed again.
Either way, I’ll be ready. And you should be too.
Stay street smart,
Jeff Zananiri
Join Aaron Hunziker Tuesday at 10 a.m. ET in the APEXWar Room, where he’ll break down the trades he’s watching, what’s moving the market right now, and how to position smartly in this environment.
If you want to stay sharp and a step ahead of the crowd, be there.
*Past performance does not indicate future results
