Trading Desk Talk

Sideways

After watching the celebrations of various Olympic athletes as they made their return voyage home, Dierks Bentley’s song “Drunk on a plane” felt somewhat fitting for this week’s theme. The song, however, did not fit much with markets and may be off brand too—so Bentley’s other hit, “Sideways,” was substituted in. In an otherwise quiet economic week, markets took their cues from technical factors (non-dominant market dynamics, instead of macro fundamentals) and traded sideways.

The 10-year Treasury rallied from last Friday’s close of 4.08% to a yield of 3.97% by the end of the week. Two trends seem to be emerging, albeit accompanied by differing time horizons. Since the fourth quarter of 2025, the benchmark yield has ranged from 3.95% to 4.30%, marked by an approximate 35 basis points (bps) channel (visible between the white bars in Figure 1).

The short-term trend toward that 4.30% watermark was due to a myriad of factors—fears of increased future Treasury supply, uncertainty on tariff revenue, threats to Fed independence, stubborn inflation, and less stressed economic indicators. The return of that trend is similarly due to a variety of dynamics, including heightened geopolitical uncertainty, fears of AI-related job market deterioration, eventual furthering of an easing cycle, and nascent weakness in credit markets with early bids for quality assets. Because these factors operate in a more give-and-take atmosphere, the market has maintained a somewhat steady short-term range, but one that is, again, primarily sideways.

Yet the longer-term trend is certainly to the downside: While the Treasury yield gyrates mostly between the lanes, it has tended to make lower highs and lower lows over the past year. The downtrend is largely due to deteriorating macroeconomic fundamentals. (Figure 2 shows that job gains have decelerated every year since the post-pandemic rebound.) At this point in the cycle, the labor market may therefore have heavier weight on the scale in determining monetary policy; a strong jobs report can delay a cut for a couple of meetings, but a broad slowdown would need to be addressed. Indeed, it has been addressed to some extent, given the multitude of cuts already enacted.

It wouldn’t be too surprising to see payrolls decline for the balance of 2026—a development that would likely embolden the dovish faction at the Federal Open Market Committee to call for additional cuts, potentially at a hastened pace. History suggests that late-stage consecutive declines in employment tend to be the norm for mature expansions. To illustrate this, we took the average monthly change in nonfarm payrolls on an annual basis before the first yearly average decline (Figure 3).

As Figure 3 shows, the most recent economic cycles were both accompanied by consecutive slowdowns in employment, similar to today’s environment, before declining outright. The Federal Reserve seems to be aware of this risk but has fallen short of predicting a negative scenario: Though the December dot plot suggested an improvement in the unemployment rate in 2026 and 2027, it forecasted a federal funds rate of 3.25–3.50% by 2026 and 3–3.25% by 2027 (Figure 4).

The FOMC seems to have minimal cuts penciled in over the next two years. But it has also historically refrained from predicting contractions. For example, on the eve of the Great Financial Crisis in December 2007, Richard Fisher, then president of the Dallas Fed, said that he was concerned about lowering rates for fear of stoking inflation. Similarly, the FOMC’s official statements in the fourth quarter of 2007 still had “roughly balanced” language regarding inflation and growth. Today’s remarks strike a similar tone. For instance:

• Susan Collins, President of the Boston Fed—“I think that it’s quite likely that it will be appropriate to hold the current range for some time. After 175 basis points of easing over the past year and a half, we are at mildly restrictive, perhaps quite close to neutral already.”
• Christopher Waller, Fed Governor—“Assuming underlying inflation continues to signal we are close to our 2% goal, the key to setting appropriate policy will be my view of the labor market.”

The takeaway: Recent weeks saw a somewhat tepid trading environment, due to a lack of definitive movement in economic fundamentals. This trend can persist, as it has, but it’s likely to cross a line in the sand eventually.

History suggests that we’re nearing that line—2025’s watermark of only 15,000 job gains provides little room to maintain downward pressure on employment growth and still have it remain positive in 2026. While the Fed is unlikely to publicly project impending weakness in the economy, the pump seems primed for an immediate response if the labor market materially declines. In the meantime, sideways is the theme.

FROM THE DESK

Agency CMBS — As the structured finance conference unfolded in Las Vegas last week, our market was uninspired or, maybe, was doing its best to impersonate Zach Galifinakis’s character “Alan” from The Hangover movies—physically present, but otherwise somewhere else. Ginnie Mae Project loans were two to three basis points wider, week over week, while DUS traded well. No major changes to the story here: Large, full-term interest-only deals are trading well, and smaller, off-the-run structures require a concession.

Municipals — AAA tax-exempt yields decreased throughout the yield curve on a week-over-week basis. The yield curve continues to steepen with the 10-year to 30-year maturity slope at approximately 160 bps currently, compared to 100 bps at this time last year. While demand is strong for new issue deals, we’ve seen less demand recently in longer maturities compared to the short-to-intermediate part of the curve. No new issues priced in the housing sector last week. Municipal bond funds took in $1.0 billion last week, the ninth consecutive week of inflows, bringing the year-to-date total to $12.83 billion. The average weekly inflow for 2026 is just over $1.57 billion; about 45% of last week’s inflows were directed to high-yield funds.

The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.